Acquisitions (from the buyer’s perspective)Tax treatment of different acquisitions
What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?
From the perspective of the purchaser, there are several important differences between structuring an acquisition as a share transaction and an asset transaction.
First, acquiring the shares of a target company does not affect the tax depreciation bases of the target company’s assets. The purchase price would be allocated in full to the acquired shares, and no goodwill would be recognised for tax purposes. Conversely, when acquiring the business assets and liabilities directly, the purchaser would recognise new tax bases on the acquired (tangible and intangible) assets and liabilities. Goodwill recognised as a result of the asset transaction is depreciable for tax purposes. For further details, see question 2.
Second, when structuring an acquisition as an asset transaction, historical tax liabilities (and historical tax assets, such as tax losses carried forward) generally remain with the seller. In a share transaction, the purchaser effectively assumes liability for all historical tax risk, which remains with the target company. This starting point can be adjusted in agreements between the parties to arrive at an appropriate allocation of liability (see question 9).
The special tax regimes applicable for companies in the oil and gas (exploration and production) and hydropower industries provide for ‘tax neutral’ asset transfers in certain circumstances.
Finally, asset transactions may trigger transaction taxes (see question 6). The sale and purchase of shares, on the other hand, does not trigger any indirect taxes for either seller or purchaser.Step-up in basis
In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
A step-up in the tax depreciation bases of the business assets and liabilities is generally only available in an asset transaction. Goodwill recognised in the transaction (very broadly, the difference between the purchase price paid and the fair market value of identifiable tangible and intangible assets) would be depreciable for tax purposes at 20 per cent per annum on a declining balance basis. Agreements between the parties with respect to the allocation of the purchase price (which could significantly affect the taxation of both seller and purchaser) are not binding on the tax authorities. Purchase price allocation studies are therefore usually prepared to support the allocation between the different types of assets and liabilities acquired.
When acquiring shares, it is not possible to push the purchase price paid for the shares in the target company down on to the underlying assets and liabilities. No goodwill is recognised for tax purposes. The goodwill arising on consolidation for accounting purposes (assuming a Norwegian purchaser) is disregarded for tax purposes (as the purchasing company would be taxed on a standalone, rather than consolidated, basis).Domicile of acquisition company
Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
Non-resident purchasers typically set up local acquisition vehicles when acquiring Norwegian companies or businesses, but this should be considered on a case-by-case basis, taking into account both tax and other effects.
From a tax perspective, the ability to offset financing expenses against taxable income would typically be an important consideration. As Norway does not allow for cross-border consolidation, offsetting financing expenses against the profits of the Norwegian target company would not be possible unless the acquisition debt is drawn down locally. This is typically arranged through a Norwegian acquisition company.
There is no tax grouping, fiscal unity or similar arrangements under Norwegian law. A degree of consolidation for tax purposes may be achieved using group contributions. A group contribution is a deductible and taxable transfer of taxable profits from one company to another. The two must be part of the same qualifying group (more than 90 per cent of capital and voting rights). The group contribution is an actual transaction, as opposed to a notional shift of profits for tax purposes, and requires a transfer of funds (or leaving the amount unsettled as receivable or payable). As a main rule, the group contribution requires distributable reserves.
Dividends from the target to the Norwegian acquisition company should be exempt from Norwegian taxation (3 per cent of the exempt dividend is added back to the taxable income unless the acquisition company holds more than 90 per cent of the shares), and there should generally be no adverse implications on exit. In the event the non-resident shareholder does not qualify for a dividend withholding tax exemption (see question 13), partial exits may in certain circumstances be complicated, as the Norwegian holding company would not be able to remit proceeds in the form of dividends without triggering Norwegian tax. It should generally be possible to address this issue by appropriate structuring steps.
In certain situations, it may be preferable to acquire the target company or business directly. For example, the withholding tax exemption for dividends distributed by companies engaging in activities subject to the special Petroleum Tax regime (see question 13) only applies to direct distributions. In the event dividends are passed up through a Norwegian holding company, the exemption would not apply on the distribution out of the holding company. In the context of an asset transaction, it may in some cases be preferable to operate the target business through a branch, as there is no branch profits tax (or similar), whereas dividends might trigger Norwegian withholding tax (see question 13).
Norwegian companies are always taxed in Norwegian kroner, irrespective of functional currency. It is not possible to make a designated currency election. If acquisition financing is drawn in a currency other than kroner, currency gains or losses would generally be taxable or deductible. As a main rule, it should be possible to defer recognition of foreign exchange gains or losses until realisation (eg, downpayment or refinancing).Company mergers and share exchanges
Are company mergers or share exchanges common forms of acquisition?
Company mergers or share exchanges are rarely used to effect acquisitions. While either alternative could, in principle, be structured in a tax-neutral manner, they severely restrict a seller’s ability to exit the investment.
Norwegian company law does not allow for all-cash mergers. No more than 20 per cent of the total consideration can be assets (including cash) other than shares issued by the acquiring company (or, in certain circumstances, another Norwegian company in the acquiring group). This means that the merger option is generally unattractive for a seller that wishes to exit more than 20 per cent of its investment.
Share-for-share exchanges have historically been treated as ordinary fair market value disposals for Norwegian tax purposes. When Norway introduced rules allowing for tax-neutral cross-border mergers, specific provisions concerning tax-neutral share-for-share exchanges were also included. Curiously, no corresponding provisions have been included in a purely domestic context. As such, it is not possible to implement a tax-neutral share-for-share exchange where both the acquiring and target company are Norwegian.
If the acquiring company is genuinely established (see question 13) in another EEA member state, a share-for-share exchange can be implemented on a tax-neutral basis. At least 90 per cent of the shares issued by the target company must be acquired by the acquiring company. In addition, as with mergers, no more than 20 per cent of the total consideration can be assets other than shares in the acquiring company. The requirement that the acquiring company be non-Norwegian complicates the position with respect to obtaining local acquisition financing.
A share-for-share exchange could also be carried out on a non-neutral basis. In the event the seller is a qualifying Norwegian corporate, or non-Norwegian, gains realised on the disposal should be tax exempt.Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
There is no tax benefit to the acquirer in issuing stock as consideration rather than cash, other than derivative benefits of structuring the transaction as a tax-neutral share-for-share exchange or merger, as discussed above.Transaction taxes
Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?
The acquisition of real estate is subject to a 2.5 per cent ad valorem stamp duty when the transfer of the right of ownership is registered. Asset transactions might trigger VAT, but an exemption is generally available when transferring a business (or part of a business) as a going concern.
The transfer of shares is exempt from VAT. No other indirect taxes apply.Net operating losses, other tax attributes and insolvency proceedings
Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?
As a main rule, a target company’s tax assets (including tax losses carried forward) are not affected by transactions in the company’s shares. There are no general provisions ring-fencing tax assets, restricting their use to profits from the legacy business, or similar.
Norway has a statutory anti-avoidance rule, as well as a general anti-avoidance standard developed by the courts. The statutory anti-avoidance rule targets transactions (whether by way of merger, share-for-share exchange, or ordinary acquisition) primarily motivated by the utilisation of the target company’s tax assets. The assessment of what has motivated the transaction should be based on objectively verifiable factors. All facts and circumstances that might shed light on the purchaser’s motivation should be taken into account, and the rule does not operate on a purely mathematical basis. That said, the relative size of the potential tax benefit compared with the value of the target company as a whole would typically provide an indication of the risk of the rules being in point.
As a general rule of thumb, the statutory anti-avoidance rule should not be applicable where the acquisition does not result in any increased possibility of utilising the tax assets. Where the purchaser has no other Norwegian group companies that might access the losses using group contributions, the anti-avoidance rule should generally not be applicable. In this scenario, the losses are effectively only available to offset future profit in the same business in which they arose. However, this must be assessed on a case-by-case basis. If, for example, a material change in the nature (or outright discontinuance) of the company’s business takes place post-acquisition, this might indicate that the losses, rather than the business itself, was the main purpose driving the acquisition.
If a company enters into arrangements with its creditors for the waiver or forgiveness of debt, (a portion of) tax losses carried forward would normally be forfeited (on a kroner for kroner basis).Interest relief
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility generally or where the lender is foreign, a related party, or both? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
Financing expenses (interest and equivalent costs) are generally deductible on an accruals basis. No distinction is made with reference to the application of the borrowed funds; interest on debt drawn down to fund the acquisition of shares, the income from which is typically tax-exempt, is in principle deductible.
Earnings before interest, taxes, depreciation and amortisation (EBITDA) restrictions on deductibility (earnings stripping rules) may apply, depending on the borrower’s circumstances. With effect for financial years ending on or after 1 January 2019, the rules distinguish between borrowers that are part of a consolidated group for accounting purposes, or would have been under IFRS principles (Group Restriction), and other borrowers (Standalone Restriction).
The Group Restriction applies if the net interest expenses of the Norwegian entities in the consolidated group (including any Norwegian branches or permanent establishments) exceed 25 million kroner in aggregate. If the 25 million kroner threshold is exceeded, the rules apply from the first kroner. The 25 million kroner is not a safe-harbour amount. If applicable, the rules cap deductibility of net interest expenses at 25 per cent of tax EBITDA. Broadly, tax EBITDA is the taxable income (after utilisation of losses and receipt and surrender of group contributions), plus tax depreciations and net interest expenses. Because EBITDA is calculated from the bottom up, factoring in elements such as tax losses and group contributions, the number may differ significantly from the ordinary accounting EBITDA. The 25 per cent test is applied on a company-by-company basis, and it is not possible to transfer unutilised headroom to other group companies.
Taxpayers may claim relief for excess net interest expenses if they qualify for the equity escape provisions. Broadly, the taxpayer must be able to demonstrate that its ratio of equity to total assets is equal to or higher than the corresponding ratio of the worldwide consolidated group. The test can be applied at the level of the individual company or the Norwegian subgroup as a whole, at the taxpayer’s option. A grace margin of two percentage points is allowed. The equity escape provisions operate on an all-or-nothing basis; if satisfied, the taxpayer may deduct all net interest expenses; if not, the 25 per cent threshold applies. The rules do not allow the taxpayer to claim partial deduction (for example, up to the group ratio).
The comparison is based on the financial statements for the preceding year (ie, the availability of the exemption for the financial year 2019 is determined based on the 2018 financial year statements). A number of technical adjustments to the borrower’s financial statements are required. The overall aim is to ensure that assets and liabilities are valued according to the same principles in the accounts being compared, and to ensure that equity and debt are only counted once (broadly, where financing operating assets). The adjusted financial statements, and relevant tax return forms, must be approved by auditors.
In order to apply either exception under the equity escape provisions, the group must have qualifying consolidated financial statements available for the comparison. Qualifying consolidated financial statements satisfy the following tests:
- the borrower applying the exception is consolidated on a line-by-line basis;
- the financial statements are prepared under one of the following accounting standards:
- Norwegian GAAP;
- the GAAP of any EU or EEA country;
- US GAAP;
- Japanese GAAP;
- IFRS; or
- IFRS for SMEs;
- the consolidated financial statements are prepared by the ultimate parent of the group, or a direct subsidiary of the ultimate parent if an accounting standard listed above provides that the ultimate parent does not need to prepare consolidated financial statements, or that the company applying the exception should not be included in the consolidation;
- if a borrower is subject to the rules but does not have qualifying consolidated financial statements, a set of consolidated financial statements may be prepared for the purposes of application of the exception; and
- even if the group ratio test is satisfied, the Standalone Restriction outlined below could still apply to restrict net interest on debt from related parties outside of the consolidated group.
A proposal containing new regulations and certain legislative amendments is currently on consultation. Very broadly, the proposals look to clarify certain aspects of the rules’ application. In certain respects, they also extend the scope of the rules, including by extending the definition of ‘companies in a consolidated group’ to cover entities that ‘could have been’ consolidated under IFRS, and by clarifying that the Standalone Restriction would apply to interest on related-party debt even if the total interest is below 25 million kroner. If enacted, the amendments will be effective from the financial year 2019.
The Standalone Restriction may apply to companies that are not part of a consolidated group (and could not have been under IFRS principles). As above, the rules may cap deductibility at 25 per cent of tax EBITDA. However, the threshold for application of the rules is 5 million kroner, and the rules only restrict net interest on related-party debt.
Related parties are entities that directly or indirectly control (over 50 per cent) or are controlled by the borrower, and entities controlled by the same direct or indirect parent as the borrower. If debt to a third party is guaranteed by a related party, it is considered related-party debt. Specific exceptions apply, such as upstream guarantees from the subsidiaries of the borrower, and guarantees in the form of a simple pledge over the shares in the borrower.
Under either rule, disallowed interest expenses may be carried forward for up to 10 years. Carried-forward interest is utilised on a first-in, first-out basis.
Finally, general arm’s-length transfer pricing principles apply with respect to interest rate and capitalisation (debt-to-equity ratio). Norway follows the principles set out in the OECD Transfer Pricing Guidelines.Protections for acquisitions
What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient? Is tax indemnity insurance common in your jurisdiction?
Purchasers would normally look to include relevant protection mechanisms in the sale and purchase agreement. The nature and scope of protection would depend on the negotiations between the parties, as well as the potential exposure identified in the due diligence procedures. Typically, the purchaser would look to obtain protection covering all financial years open to reassessment, and tax claims are therefore typically regulated separately in terms of provisions limiting seller’s liability.
In the context of a share transaction, the sale and purchase agreement would typically include warranties (which the seller might disclose against), and indemnities. Full tax deeds are often observed where the purchaser is non-Norwegian (in particular from a common law jurisdiction), but less frequently so in a purely Norwegian context.
Warranty and indemnity insurance has also become more common. With recent legislative amendments extending the general statute of limitations for reassessment to five years, this trend appears likely to continue.
The tax treatment of payments under warranties or indemnities depends on how the agreement regulates such payments. Normally, the agreements provide that such payments should be an adjustment to the purchase price. The payments should therefore not be taxable in the hands of the purchaser (although they may reduce depreciation bases on tangible and intangible assets in the context of an asset deal).