The Norwegian exit taxation has become stricter – what about inheritance?

| Insight

The Norwegian Parliament has tightened up the rules on Norwegian exit tax. With effect from 29 November 2022, the exit tax no longer lapses five years after the emigration. The tax will never lapse unless the person immigrates back to Norway. An obvious question will therefore be what happens to the exit tax if the taxpayer dies after emigration. Different solutions may be contemplated, but the law does not provide clear answers to this.

The rules on exit tax on shares and certain other securities mean that private individuals who move from Norway and becomes resident for tax purposes in another country must pay tax for latent profits on shares etc., as if the shares had been sold the day before emigration.

Change in law is now in force
As the rules have been until 28 November 2022, the exit tax ceased to apply if the shares were not realized five years after emigration. Based on the budgetary agreement between the Government and SV which was presented on 29 November 2022, the Norwegian Parliament has adopted an amendment to the Norwegian Tax Act.

After the change in the law, the deferred tax upon emigration will not lapse after five years, and it will never lapse in the future unless the taxpayer moves back to Norway. The exit tax has also been extended to apply to transfers of shares etc. to family members other than spouses, when the recipient is resident abroad. Now, transfers to, among others, children, grandchildren, parents, grandparents, uncles and aunts, who are resident abroad, will trigger the exit tax. The change in the law came into force on 20 December 2022 with effect on transfers and emigration that take place 29 November 2022 or later.

Payment postponement
However, even if a tax liability occurs at the time of emigration, the tax will not be payable immediately. The taxpayer can on certain terms be deferred until the shares are actually realized or the shares are given as a gift to someone who is not resident in Norway for tax purposes. This means that the tax liability will be present as long as the taxpayer does not move back to Norway. Throughout this period, the taxpayer will have reporting obligations to Norway, where it must be documented that the taxpayer still owns the shares and where the taxpayer is resident, even if the taxpayer never realizes the shares.

What happens in inheritance?
After the change in the law, the question is what happens to the deferred exit tax if the migrant dies. Different solutions may apply depend on how the law is to be understood. However, as of January 2023, this is unclear, as the provision regarding exit tax is completely silent about the issue.

The general rules for inheritance will in principle apply, including the principle of continuity for the shares. The principle of continuity applies to all tax positions linked to the transferred shares and means the heir takes over the deceased’s tax positions on the shares.

However, the exit tax is not linked to the shares themselves, but to the person emigrated. Thus, it seems not correct that the exit tax accompanies the shares when transferring the shares to the heir.

The estate of a deceased person and sole heir enters into the deceased’s tax positions. Tax positions that are not related to a capital object (and neither business operations) are continued in the heir’s hand if the heir takes over the liability for the deceased’s debt. If the heirs do not assume responsibility for the deceased’s debt, they may not take over the assets. If the exit tax is to be regarded as such a tax position, this means that if the heirs are to take over the assets, they must also take over the debt of the deceased and thus the tax position latent exit tax. The question is whether the heirs in such a case will also be able to take over the payment postponement as long as the heirs meet the conditions for such a payment postponement.

However, this may, on a principal basis, be problematic in relation to international law. The question is whether the Norwegian Tax Act, interpreted in the light of international law, can impose obligations related to the deceased’s exit tax (including reporting obligations) on heirs not being Norwegian citizens or residents in Norway at the time of acquisition.

An alternative to the above is that the latent exit tax must be settled as part of the estate transfer, where the tax is included as a liability (debt) in the estate. If that is the rule, this should be clear from the wording of the law.

Another option is that the latent exit tax is considered to cease upon the death of the deceased. Transfer of inheritance in the event of estate transfer is not regarded as realization. This indicates that transfer in the event of inheritance shall not trigger payment of the exit tax. However, it this is the rule, this should also be clear from the wording of the law.

What now?
We have been informed by the Ministry of Finance through the Tax Law Department that the Ministry is aware of the issue. However, the issue has not been considered in connection with the change in the law and has therefore not been further investigated. We therefore assume that there will be clarifications from the Norwegian authorities on how the rules on exit tax should be understood in relation to inheritance in the event of death.

Until then, it will be quite demanding for people to deal with the regulations, especially since the payment of exit tax requires that the taxpayer has alternative financing to cover the tax as the shares are not actually realized.

Should you have any questions about the legislation on exit tax or require assistance in connection with moving from Norway, please do not hesitate to contact us.