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Published on 12 February 2010
As BA-HR has accounted for in previous newsletters, several shipping companies have instituted legal proceedings against the Government, alleging that the taxation at the transition from the former to the present tax regime is in contravention of § 97 of the Constitution, which prohibits retroactive acts. The issue has been addressed both by Aust-Agder District Court and by Oslo District Court. At Aust-Agder District Court, the Court ruled in favour of the Government, while Oslo District Court ruled in favour of the shipping company. Both cases were appealed directly to the Supreme Court, and were merged for joint hearing. The Supreme Court has today, by 5 of the 11 justices dissenting, concluded that the transitional rules are in contravention of § 97 of the Constitution.
Background
As from the income year 2007, the special tax regime for the shipping industry has been altered form a regime with deferred taxation to a regime with final tax exemption. The former regime implied that income from the shipping industry was exempt from current taxation, provided, however, that the profit was retained within the company. Thus, under the former tax regime, the shipping companies could choose whether and, if so, when, the income should be subject to taxation. After the legislative amendment, the shipping companies are exempt from taxation of newly earned income, even if the income is distributed to the shareholders or the company exits from the regime.
The transitional rules adopted at the introduction of the new regime imply that the income earned under the former regime will be subject to tax, even when retained within the company. At least two thirds of the untaxed income from the former regime shall be taken to income over a period of 10 years, while up to one third may be exempted from taxation if the company implements qualifying environmental investments.
The Supreme Court’s decision – the transitional taxation is contrary to the Constitution
As previously mentioned, the decision by the Supreme Court was delivered with five of the eleven justices dissenting. The majority, headed by Justice Utgård, the justice giving the leading judgment, concludes that the transitional taxation is in contravention of the Constitution.
In the majority’s view, the transitional rules must be deemed to imply a retroactive taxation, as it concerns income subject to the former regime in 1996 and income earned within the former regime as from 1996. The majority refers to the fact that under the former regime, the companies had a justified expectation that the taxation had been determined, and that any new rules would, in the usual manner, only be effective as from the implementation thereof. However, the transitional rules deprived the companies of the possibility of deciding if and when shipping income earned under the former regime should be subject to taxation, which entails a “material increase” of the effective tax burden of this income.
The majority’s view was based on the fact that the retroactive transitional taxation only may be justified by strong social considerations, which as such are regarded to be the relevant norm for assessment pursuant to § 97 of the Constitution. As such strong, social considerations are not applicable in this case, the transitional rules entail an unconstitutional retroactivity.
The majority did not attach importance to the fact that the previous gains were retained within the companies at the time of transition, nor that the transitional rules were adopted as a “package” together with the new regime entailing tax exemption also in the event of distribution. It further appears from the judgment that the assessment by the Storting (Norwegian Parliament) can not be conclusive, since the issue basically is not sufficiently questionable and since the Storting had based its view on an incorrect legal norm of assessment.
The minority, on their part, concludes that the transitional taxation is not in contravention of § 97 of the Constitution. Contrary to the majority, the minority finds that the shipping companies could not have a justified expectation that the previous income should be exempt from taxation at the transition to the new regime, at the same time as the transitional taxation must be viewed in conjunction with the tax exemption of the new regime (the “package solution”). Compared to the Storting’s elaborate assessment of the constitutional issue, the minority finds that the transitional taxation does not entail an “obviously unfair or unjust” retroactivity, which according to the minority’s view is the relevant norm of assessment.
The implications of the Supreme Court’s decision – what now?
The Supreme Court’s judgment implies that the tax assessment of the litigant companies must be annulled, and that a new tax assessment must be determined. In § 11-1 No. 5 of the Tax Assessment Act it is stated that:
When the Court finds that the party liable for tax only is liable to pay a share of the assessed tax, and there is insufficient information to determine the correct tax amount, the Court shall in its decision indicate how the new tax is to be assessed.
Notwithstanding the above, the Supreme Court has decided not to determine how a new assessment shall be made:
“I can not see that there is any basis for giving any instructions as to the determination of a new tax assessment … in order to avoid that a new assessment is in contravention of § 97 of the Constitution.”
Thus, the Supreme Court has found the issue of a new tax assessment to be so complicated that § 11-1 No. 5 of the Tax Assessment Act has been derogated from. The basis for the new assessment must be that the transitional rules are set aside at the new assessment (only) to the extent necessary in order to eliminate the contravention of the Constitution. This implies that the transitional tax assessed for 2007 and 2008 must be reimbursed to the shipping companies (including interest). It should, however be advisable for the companies to consider the fact that the profit calculated at the time of transition may still be considered to be taxable at distribution, as it was under the former legislation.
In practice, the Ministry of Finance must get involved either through a directive regarding the new assessment and/or by a proposal for a new and constitutional legislation, clarifying the tax assessment of the companies concerned.
The decision will in practice entail that also for other companies subject to the transitional rules, who have appealed the tax assessment, a new tax assessment shall be made. Admittedly, the majority of the Supreme Court states that the assessment as to the Constitution basically must be made “specifically for those who are party to the law suit”. It continues, however, by stating that the parties to the law suit must be considered as representing the group of shipping companies for whom the transitional arrangement has the most comprehensive implications. It is therefore unlikely that the tax authorities will uphold the liability for transitional tax in the pending appeal cases. Consequently, it must be assumed that the companies having appealed their tax assessment will be comprised by the tax assessment instruction and/or the legislation which now may be expected.
In our opinion, it is most likely that the tax assessment will be altered, also for shipping companies that have not appealed the transitional taxation.
The contents of this newsletter is merely intended as general information, and shall neither replace or be regarded as legal advice. The content may often be simplified and not adjusted to the situation of the individual recipient, and one should therefore always seek professional legal advice. Bugge, Arentz-Hansen & Rasmussen assumes no responsibility for any errors or faults in this newsletter or for any decisions that wholly or in part are based on the content of this newsletter.