Norway has for some years had so called exit tax rules that is triggered when a Norwegian individual tax resident emigrates from Norway with a latent capital gain on shares that are owned at the date of emigration.
The fact that over the past two years many of the wealthiest Norwegians have emigrated Norway for tax reasons, have led to the imposing of more restrictive exit tax rules by the government. In this blog, we'll look into what the Norwegian exit tax entails and its consequences for you.
The exit tax proposal – effective from March 20, 2024
On March 20, 2024, the government issued a press release regarding a proposal for hearing, which will tightening the exit tax.
The most relevant changes are:
- The exit tax must be paid no later than twelve years after emigration, regardless of whether the shares are realized.
- The exit tax will be triggered if the taxpayer dies while abroad.
The exit tax is triggered if the emigrant has share with a latent gain exceeding NOK 500 000.
A separate threshold of NOK 100 000 is proposed before triggering exit tax on the donor transferring shares as a gift to a recipient residing abroad.
The exit tax rate equals the capital gains tax of 37,84 %.
When will the exit tax enter into effect?
The deadline for comments under the hearing procedures is May 21, 2024.
After this date, the government will then propose amending the tax act. This will likely be at the opening of the Parliament in the beginning of October 2024, and the Parliament will most likely approve the amendment in November / December.
Irrespective when this is enacted into law by the Parliament, the changes will take effect from March 20, 2024, which was the date of the press release.
Also read: A brief look at Norwegian wealth tax
Events that trigger the exit tax
The exit tax is triggered if,
- the individual shareholder no longer is a tax resident of Norway according to a tax treaty entered into by Norway, or
- the individual shareholder no longer is a tax resident of Norway according to Norwegian domestic tax law.
- the individual shareholder gives the shares as a gift to a person that is not a tax resident of Norway.
The exit tax under a) and b) is not triggered if the latent capital gain is less than NOK 500 000 or under NOK 100 000 under c). However, if the thresholds are exceeded, then all the latent gain is subject to tax.
In this context, please note that when computing the exit tax base on shares traded in another currency than NOK, e.g. in USD, the cost price and the exit value of the shares should likely be based on the values converted to NOK at the date or purchase / or immigration and at the date of emigration from Norway. Thus, depending on the foreign exchange fluctuation, even though the shares may have dropped in USD value, there could be an exit capital gain when converted to NOK.
Events that trigger the exit tax payment
Under the former rules the payment of the exit tax was triggered only if the shares were sold. According to the proposal, the tax will have to be paid even if the shares are not sold.
There will be three alternative methods of paying the exit tax:
- Payment of 100% of tax upon emigration. The tax payment must be made within end of May in the year after emigration.
- Payment in interest-free instalments over twelve years. (1/12 every year)
- Payment at the end of the twelve-year deadline, but with the addition of interest
Further, in the event that the taxpayer dies while living abroad, the exit tax must be settled immediately. If the taxpayer moves back to Norway with the shares intact within the twelve-year period, the tax liability will be waived, and any tax already paid on these shares will be refunded with an interest.
However, if the taxpayer thereafter decides to emigrate again, the bases for the exit tax will be equal to the increased value during the “second” stay in Norway added the exit tax base upon the first emigration date.
Limitations to the exit tax applicable of expatriates in Norway
The proposal entails that the exit tax shall only encompass taxes on value changes that have occurred while the shareholder has been tax resident in Norway.
Consequently, exit tax shall not be calculated on gains accrued before any immigration to Norway. Further, the exit tax will not be reduced in case the shares decrease in value after emigration.
No tax credit for foreign taxes
Under the old rule, Norway should grant a tax credit for taxes paid to the country where the shareholder is a resident when the shares are sold.
This rule is being proposed abolished and thus Norway will no longer grant a foreign tax credit.
What will be the total tax burden?
The tax burden will likely be perceived as substantial higher than 37.84%.
The reason is that the shareholder must finance the payment of the exit tax. If this is done by way of dividends, there will be payable dividend tax before the exit tax can be paid.
If the dividend tax rate in the is 35% in the country of immigration, and the exit capital gain is 100, then the company must distribute 58.2 to pay both dividend tax and the exit tax.
(58.2 x 35% = 20.37 and 100 x 37.84% = 37.84. Further 20.37 + 37.84 = 58.2.)
The effective tax rate in this scenario is thus almost 60%.
Also read: How to plan taxes and avoid Norwegian net wealth tax
Now what, do you need to plan for your exit tax?
As the rules were presented only recently and not yet enacted, it is a bit premature to propose any tax planning. However, one issue to consider before migrating from Norway, is – if possible - to empty all the retained earnings in the company in order not to pay tax twice on the value of such retained earnings.
At Magnus Legal, we possess extensive expertise in Norwegian tax law and regulations, having aided numerous individuals in achieving favorable tax outcomes. Should you have inquiries concerning the Norwegian exit tax proposal and how it pertains to your circumstances, do not hesitate to reach out to us.