Introduction
In the business world, there are many ways in which assets can be transferred. This can be done through shares or company interests, or through business transfers ("sale of assets"). If real estate is included in the transaction, this often creates additional challenges, including mitigating any capital gains tax and, if possible, avoiding paying document duty.
Below, we will look at a hypothetical case where a parent company is to sell all shares in a subsidiary, while the buyer is to take over a commercial property owned by the parent company. Can this be done in a way that ensures that the parent company avoids capital gains tax and document duty?
The answer is yes, if the transaction is structured as a so-called dropdown demerger – merger, often also referred to as a vertical demerger.
Dropdown spin-off/merger – how to proceed?
The background to the transaction is that Peder Ås is the sole shareholder in Pengebingen AS. The company owns 100% of the shares in Vekst AS. Pengebingen AS also owns the commercial property at Fremskrittsveien 100, where Vekst AS's production takes place. Marte Kirkerud is the sole shareholder in Glupsk AS. In recent years, the company has specialized in acquiring companies in the same industry as Vekst AS. Marte is particularly on the lookout for companies that own their own production facilities.
Peder and Marte agree that her company Glupsk AS will purchase Vekst AS and Fremskrittsveien 100. The purchase of Vekst AS will be made through an ordinary share purchase agreement. However, the purchase of the property can be structured in a more favorable way than through an ordinary sale of the property from Pengebingen AS to Glupsk AS. In order to avoid tax as a result of a transfer of the property, and so that the buyer does not have to pay document duty on the value of the property in connection with the transfer, the property transfer can instead be carried out as follows:
a) Peder Ås establishes the company Fremskrittshjelp AS and subscribes for all shares.
b) Pengebingen AS establishes Fremskrittsveien 100 AS and subscribes for all shares.
c) Pengebingen AS carries out a demerger, whereby Fremskrittsveien 100 is transferred to Fremskrittshjelp AS. Actual values are used as a basis, and as compensation for the transfer of
the property, Pengebingen AS receives shares in Fremskrittshjelp AS.
d) Fremskrittshjelp AS and Fremskrittsveien 100 AS then merge, with the latter as the acquiring company. The property is now owned by Fremskrittsveien 100 AS.
e) As the transactions are based on market values and with tax continuity, the process will not trigger capital gains tax or document duty.
f) Fremskrittsveien 100 AS is then transferred to Glupsk AS, which can then choose to merge the property into Glupsk AS.
The process is relatively extensive. The rules governing mergers and demergers are set out in the Companies Act, in Chapters 13 and 14 respectively. Board meetings must be held in the companies concerned, the boards must draw up a demerger plan*, they must prepare a separate statement on the reasons for and effects of the demerger, which must be approved by the auditor, general meetings must be held, new articles of association must be drawn up, capital reductions and capital increases must be carried out, etc.
*(if both the transferring and acquiring companies have already been established, they may prepare a joint demerger plan)
Two notifications must be sent to the Register of Business Enterprises: The first notification announces the demerger decision and gives the company's creditors a six-week deadline to raise objections to the demerger. If no creditors object, a new notification must be sent to the Register of Business Enterprises after the deadline has expired. This notification states that the demerger has been completed. This notification does not need to be announced.
Once the demerger is in place and the property has been transferred to Fremskrittshjelp AS, the next step in the process will follow. Fremskrittshjelp AS will then be merged into Fremskritts-veien 100 AS. This also requires two notifications to the Register of Business Enterprises with an interim creditor notice.
Once the merger has been registered in the Register of Business Enterprises, the title to the property must be transferred from Pengebingen AS to Fremskrittsveien 100 AS. All property transfers in Norway are, in principle, subject to licensing. This means that, in principle, a license application must be submitted and it must be argued that the transfer meets the applicable licensing conditions.
Fortunately, there are extensive exceptions to the main rule. In practice, therefore, the vast majority of real estate transactions are exempt from licensing. However, a self-declaration of exemption from licensing must still be submitted. This is done by filling out a standard form, which is sent to the municipality where the property is located. If the municipality approves the notification, it will normally send an electronic notification to the Norwegian Mapping Authority.
At the same time, a deed must be submitted for registration with the Norwegian Mapping Authority. The deed should be accompanied by an explanation of the process and relevant documentation. Fremskrittveien 100 AS will then be able to register as the owner without paying a document duty of 2.5% of the property's value.
Summary
A dropdown demerger can therefore be a practical tool if you want to sell off parts of a group that includes real estate. It can also be practical to use this model for internal reorganizations within your own group.
In both spin-offs and mergers, an auditor must confirm the accuracy of a statement that the board of directors is to present to the general meeting. A dropdown spin-off merger involves several financial assessments. It is crucial that these are correct, otherwise there is a risk that the process may trigger both tax and duties. We therefore always recommend that the lawyer assisting in the process obtains the client's consent to engage an auditor with relevant experience to quality assure the financial and tax aspects of the process.
The above description only covers the main points of the process. If you think that a similar process might be relevant for your company, please contact us for a more detailed discussion of how we can assist you.