Translation of a Request for an Advisory Opinion from
Oslo tingrett (Oslo District Court)
Case E-15/11; Registeredat the EFTA Court under E-15/11-1
Original language: Norwegian
OSLO TINGRETT (OSLO DISTRICT COURT)
Doc. 67
EFTA Court
Registry
1, rue du Fort Thüngen
L-1499 Luxembourg
Your reference / Our reference / Date10-147861TVI-OTIR/01 / 11 November 2011
Request for an Advisory Opinion
Pursuant to Section 51a of the Norwegian Courts of Justice Act and Article 34 of the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice, Oslo tingrett (Oslo District Court) requests an Advisory Opinion from the EFTA Court in Case No 10-147861TVI-OTIR/OL.
Plaintiff: Arcade Drilling AS
Counsel: / Advocate Hanne SkaarbergHolenAdvokatfirmaetPriceWaterhouseCoopers AS
NO-0016 Oslo
Defendant: The State, represented by Tax Region West
P. O. Box 8103
NO-4086 Stavanger
Counsel: / The Office of the Attorney General (Civil affairs)represented by Advocate AmundNoss
P. O. Box 8012 Dep,
NO-0030 Oslo
******
1. Questions to the EFTA Court
The case before Oslo tingrett concerns the validity of a decision concerning the tax assessment of Arcade for the 2001 and 2002 income years dated 22 March 2010.
On 22 March 2010, Tax Region West adopted a decision to revise the tax assessment of Arcade Drilling AS (in the following called Arcade) for the 2001 and 2002 income years. The main point in the revision decision was that, as from 19 December 2002, Arcade was deemed to have moved its head office out of Norway. Hence, Tax Region West deemed that Arcadewas under an obligation pursuant to company law to liquidate, and that this gave rise to liquidation taxation regardless of whether the company was actually liquidated.
Tax Region West has given notice of the imposition of 60% additional tax in the case, but a decision concerning additional tax has not been made.
On 20 September 2010, Arcade filed legal action against the State claimingannulmentof the tax assessment for the years in question. Arcade has argued that the assessment is invalid, because, inter alia, the right to revise the assessment pursuant to the Tax Assessment Act has expired, that the liquidation tax lacks authority under the Taxation Act, that the liquidation tax is in contravention of the Tax Treaty between Norway and the UK and that the liquidation tax is in contravention of EEA law. It is furthermore claimed that there are errors of procedure and errors in calculating the gain.
A notice of defence was filed on 15 October 2010. The State contests the invalidity objections and maintains that the tax assessment is valid.
On 3 February 2011, Oslo tingrett decided to request an Advisory Opinion from the EFTA Court concerning the validity of liquidation tax under EEA law. On 14 June 2011, Oslo tingrett decided on the wording of the questions for the EFTA Court. On 19 October 2011, the parties submitted an agreed draft letter of questions to Oslo tingrett for referral to the EFTA Court.
If Arcade is deemed to have moved its head office to another EEA State, the tax assessment decision will be invalid insofar as the liquidation tax is concerned provided that such tax is in contravention of EEA law. The district court has therefore decided to request the EFTA Court’s Advisory Opinion on the following questions:
1)Is it a restriction pursuant to Article 31 EEA, cf. Article 34 EEA, to impose liquidation tax on a company if national company law entails an obligation to liquidate the company because the company has transferred its de facto head office from Norway to another EEA State?
Is it of any significance that deferral of tax payment is not given until a realisation, if any, is effected?
2)In the event that the district court holds that a restriction exists: what criteria will be decisive in determining whether the national regulation pursuesgrounds of overriding public interest and whether it is suitable and necessary for the attainment of such grounds?
The parties to the case disagree as to whether a liquidation obligation exists pursuant to Norwegian national law. In this specific case, the State has conceded that the imposition of liquidation tax on Arcade cannot take place if it cannot be established that, pursuant to company law, a liquidation obligation exists when a limited liability company emigrates to another State. The district court has not yet concluded as regards this question. The question for the EFTA Court has therefore been formulated on the assumption that a liquidation obligation exists under Norwegian national law.
2.Background to the case
The case concerns the validity of a decision concerning the tax assessment of Arcade for the 2001 and 2002 income years dated 22 March 2010. Here, the company’s income was increased by NOK 70,923,400 for 2001 and by NOK 2,372,777,524 for 2002. A credit deduction of NOK 28,616,806 was granted.
On the same date, a draft decision was sent to the company concerning additional tax resulting from a purported failure to provide information, at an increased rate of 60% of the tax imposed, plus interest at a rate of 7% for six and five years, respectively. To date, the tax office has not made a decision concerning additional tax.
Arcade was incorporated on 26 October 1990 and registered as a Norwegian limited liability company in Norway. The company was part of the Reading & Bates group and, to date, its business has consisted of ownership and partly operation of two oil rigs: Paul B Loydand Henry Goodrich. From 1995, both these rigs were in operation on the UK continental shelf and the company did not have any operational activities in Norway. As from 1995, marketing, financing and operational management of both rigs were attended to by employees at Reading & Bates’s offices in Aberdeen. From 1999, the Henry Goodrich rig was leased to R&B Falcon Canada Co under a bare boat charter, meaning that the rig was operated by the lessee. As from 1999 and until today, Arcade’s business has consisted of operation of the Paul B Loyd rig and leasing out of the Henry Goodrich rig. The company’s board of directors had two members resident in the USA and two members resident in Norway.
As from 1995, the company had no employees in Norway. The company maintained a registered address, administered by a Norwegian lawyer, and held some board meetings and annual general meetings in Norway.
On 31 January 2001, Reading & Bates was taken over by the Transocean group. Hence, Arcade also became a part of the Transocean group. The key employees of Reading & Bates’ Aberdeen office stepped down from their positions, and responsibility for following up Arcade’s business after the takeover was taken over by the Transocean group’s Aberdeen office.
At the general meeting in Oslo on 22 March 2001, a new board of directors was elected, consisting of two Norwegians and two board members from the USA. At the same time, it was decided to move the company’s registered address from Oslo to Stavanger. In a telephone board meeting on 1 May 2001, Robert L Long was elected chair of the board and KjellBjerke was appointed general manager. Arcade held one more board meeting in 2001.It was decided to hold the meeting in Aberdeen, physically attended by all board members. As from 19 December 2002, the company’s Norwegian board members were replaced by board members resident in the UK.
During the 2001 and 2002 income years, Arcade was legally registered in Norway; the company had a partially Norwegian board of directors and a Norwegian general manager. The company had activities and operational management functions in Aberdeen, and, as from June 2001, the board held its meetings there. Both Norwegian and UK law contained provisions under which the company might conceivably have anobligation to pay tax on all its worldwide income and gains. Pursuant to the Tax Treaty between Norway and the UK, the decisive factor was the ‘place of effective management’ of the company.
On submitting its Norwegian tax return for 2001, the company included a proviso that the UK tax authorities might conclude that the company was based there for tax purposes, in which case the company would no longer be under an obligation to pay tax on all its worldwide income and gains to Norway.
The UK tax authorities decided that Arcade Drilling AS was taxable as a UK-based company as from 1 January 2001. This decision was sent to Stavanger Tax Office. The tax office obtained some more information from the company and then accepted the information provided by the company without further investigation.
In 2005, Økokrim (the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime) conducted several searches of Arcade Drilling AS, associated companies in Norway and the company’s advisers and auditors. A further search was carried out in Aberdeen in 2007. A considerable volume of documents was seized and then submitted to Stavanger Tax Office. Based on a review of these documents, Stavanger Tax Office revised the tax assessment of the company. The revision decision was based on emigration not having taken place on 1 January 2001, but as late as in December 2002, and furthermore that the company as a consequence the emigration became subject to a liquidation obligation under company law.
The revision decision means that Arcade’s general business income for 2001 and 2002 is liable to taxation in Norway. The decision also entails liability for Norwegian liquidation tax at the end of 2002. A partial credit deduction was granted for tax paid abroad.
The liquidation tax constitutes the biggest item by far, involving an income increase of NOK 2,155,323,524. Tax, additional tax (notified but not imposed) and interest on this amount are estimated to amount to NOK 1,303,539,667.
Arcade appealed the assessment to the tax appeals board and filed legal action the case the same year. However, the appeal has been withdrawn, meaning that the case is now pending before the courts only.
3.Description of national law
Norwegian limited liability companies legislation
Section 2-2 point 2 of the Norwegian Act relating to limited liability companies (the ‘Limited Liability Companies Act’) (enclosed) requires limited liability companies incorporated under Norwegian law to have a ‘registered office’ in Norway.
In an interpretation statement of 6 January 1998 (enclosed), the Ministry of Justice’s Legislation Department has stated that companies that move their head office out of the realm are in breach of Norwegian company legislation. According to the interpretation statement, whether a head office can be deemed to have been moved out of the realm will depend on an ‘overall evaluation, based not only on where the board’s management functions are exercised’. There is no case law defining the conditions as to when a head office will be considered astransferred from the realm. In the legal doctrine, opinion vary concerning what is required to establish that a head office has been moved and whether or not a head office or only a registered office in Norway is required under Norwegian limited liability company legislation.
According to the Ministry’s statement, if a limited liability company’s head office is moved from the realm, this is an illegality the company is obliged to rectify. This can be done by moving the head office back or by dissolving and winding up the company. In principle, it is the company’s general meeting that is competent to decide on dissolution or winding up of the company, cf. Section 16-1 of the Limited Liability Companies Act (enclosed). If the general meeting fails to make such a decision in connection with moving the head office out of the realm, some commentators assume that the district court can decide to dissolve the company pursuant to Section 16-15(1) point 1 of the Limited Liability Companies Act (enclosed). This view holds that, in such cases, it follows from the Act that the company must be dissolved. This view is disputed. Enforced dissolution pursuant to the Limited Liability Companies Act can only be effected after notification of the company with a deadline to rectify the situation, and aftera decision by the district court.
The parties to the case disagree as to whether Norwegian company law is based on the real seat theory in the case of companies incorporated under Norwegian law, whether Arcade has breached any specific obligations under the Limited Liability Companies Act, and, if so, what consequences this should have.
Liquidation taxation of companies
If a limited liability company is dissolved, the company is liable to liquidation tax,entailing that all the company’s assets are realised with a tax liability on the company’s hands in accordance with the universal rules on realisation laid down in the Taxation Act.
Before a company is dissolved, it must submit a tax return and demand to be pre-assessed, cf. Section 4-7(10) of the Tax Assessment Act. For the current income year, the pre-assessment shall cover the period until the company is dissolved, cf. Section 8-10 of the Tax Assessment Act. Consequently, on submitting its tax return for pre-assessment, the company shall state all latent tax liabilities for taxation, including gains on the realisation of assets. The withdrawal of operating assets in connection with a dissolution, i.e. as liquidation dividend to the shareholders, is deemed to be realisation and must be included for taxation in the pre-assessment, cf. Sections 5-1, 5-2 and 5-30 of the Taxation Act.
For shareholders liable to taxation in Norway, liquidation will involve realisation tax, i.e. shareholders’ gains/losses on the shares will be liable to tax/deductible, cf. Section 10-37 of the Taxation Act.
In a statement of 7 May 1998 from the Ministry of Finance (enclosed), it is assumed that in emigration cases, a company can be liable to liquidation tax even if it is not actually liquidated or its dissolution is not demanded.
Other Norwegian tax legislation in 2001 and subsequently
In 2001/2002, Norwegian law did not contain any rules on tax liability in connection with emigration ofcompanies. Taxation of Arcade is therefore based on the company being subject to a liquidation obligation pursuant to company law, and that exit tax can be imposed on the basis of universal rules on realisation tax, cf. the above, and is independent of actual liquidation.
In 2001/2002, the Norwegian Taxation Act had (and still has) rules on reversing write-downs when a Norwegian company moves its operating assets out of the Norwegian taxation area, cf. Sections 14-60 ff. However, these rules do not apply if a rig has been subject to general write-downs in Norway for at least eight years. This was the case with Arcade’s rigs, and these provisions were therefore not applicable.
Exit tax for companies was regulated by law in 2007 in the case of SE and SCE companies. In 2008, the legal provision was extended to include other types of enterprises based in Norway, see Section 10-71 of the Taxation Act (enclosed).
In 2010, the EFTA Surveillance Authority (ESA) stated that Norwegian exit tax comes into conflict with the EEA Agreement. In a Reasoned Opinion of 2 March 2011, ESA has notified of further measures if the Norwegian tax rules are not amended.
Based on a consultation paper of 18 January 2010, Norwegian tax legislation was amended with effect from 2011, cf. Legislative Proposition No 78 (2010-2011), which was submitted on 25 March 2011. Following the amendment, a company shall no longer become liable to taxation on moving its head office from Norway to another normal tax State in the EEA.
In 2008, a provision relating to realisation settlement upon withdrawal of assets or liabilities from the Norwegian tax area was adopted, cf. Section 9-14 of the Taxation Act (enclosed). If, at the same time as the company emigrates, individual objects are withdrawn from the Norwegian taxation area, taxation may follow from Section 9-14 of the Taxation Act. In cases like Arcade’s, Section 9-14 of the Taxation Act will initially lead to taxation of gain on a rig owned by a company whose seat is moved from Norway to the UK, but deferred payment of such tax is granted. Pursuant to Section 9-14 of the Taxation Act, the assessed tax will lapse if the operating assets are not sold within five years of the income year in which the emigration took place.
Exit tax was also introduced for physical persons with effect from 2008, cf. Section 10-70 of the Taxation Act (enclosed). Pursuant to this provision, taxation can be postponed until the shares are actually realised, and the tax liability lapses if the shares are not sold within five years of relocation.
None of these legal provisions are applicable to the assessment of Arcade for 2001/2002, nor are they invoked as the legal basis for the tax assessment.
4.EEA law
EEA law clarifications exist relating to exit tax for physical persons, including the N and Lasteyrie de Saillant cases. Clarifications also exist relating to company-law topics in connection with cross-border activities and moving head offices, cf. in particular the Daily Mail and Cartesio cases. The parties disagree as to what bearing these cases have on liquidation taxation of companies. The National Grid case, which has been referred to the Court of Justice of the European Union (ECJ), addresses this issue, but the case has not been decided.