Norway: Norwegian Supreme Court Holds Resident Taxpayers Liable For The Income And Capital Gains Of Non-Resident Trusts Under CFC Regime

The trust was established in 1980 in order to protect the economic interests of the family who, at the time, controlled a UK group of companies, which was in a depressed financial situation. After the trust was established, it acquired a majority interest in parts of the family’s business. During the time since the acquisition, these parts of the business have performed very well, and the net value of the estate of the trust was approximately CHF 200 million in 1994, which was the fiscal year in question in the case.

The settlor of the trust was a family friend who was resident in Switzerland. The initial trustees were residents of the UK and Liechtenstein, but these have later been exchanged for trustees resident in Switzerland and Liechtenstein. The beneficiaries were two brothers, one of whom had initiated the settlement, and their spouses, and their descendants and their spouses. The family members, of which there were thirteen in 1994, are also the present beneficiaries of the trust. Eleven of these were resident in Norway.

Norway introduced CFC legislation in 1992. The legislation covers all participants in companies, other entities or estates that are resident in low tax jurisdictions and that are directly or indirectly under the control of Norwegian taxpayers. Broadly speaking, control is deemed to exist where Norwegian resident taxpayers own or control at least 50% of the capital or parts of the non-resident entity. The legislation applies to both corporate and individual participants. In this case, the Revenue thought that the requirements were fulfilled, and attributed to the Norwegian resident beneficiaries a proportional part of the (at the time) losses of the trust. The assessment was upheld by Oslo City Court, but overturned by Borgarting Appeal Court.

The Supreme Court overturned Borgarting Appeal Court's decision by a majority decision of four to one. The majority of the judges held that it was impossible to draw a clear distinction between ownership and control as criteria for the application of the regime. The main objective of the regime was to make a charge to tax on investments held through vehicles in low tax jurisdictions. In the light of this, the majority held that it was less relevant whether or not the beneficiaries were able to execute any rights and powers ordinarily attributable to ownership. The anti-avoidance aspect of the legislation was also emphasised.

The Supreme Court held that the trust was an independent estate and that it would have been liable to tax if it had been resident in Norway. Since there was no charge to tax in Liechtenstein, it had to be regarded as being resident in a low-tax jurisdiction, as defined by the legislation.

The judgment means that all beneficiaries of non-resident trusts are likely to fall under the CFC legislation, provided that beneficiaries representing more than 50% of the interest in the trust are resident in Norway. The Revenue has so far not made any statement as to how these issues will be followed up in the future. Taxpayers fearing that they may be liable to tax for income and capital gains of non-resident trusts should seek professional advice as to how to report this to the Revenue well before any enquiries are made.