Norway: Foreign shareholders face 10-year withholding tax reassessments after Supreme Court ruling
Until recently, it was unclear whether the Norwegian tax authority (NTA) could reassess the withholding tax liabilities of foreign shareholders as far back as two or 10 years when the distributing company had disclosed incorrect or insufficient information.
Trond Eivind Johnsen
However, in a recent ruling relating to the Transocean complex, the Norwegian Supreme Court confirmed that the NTA could levy withholding tax on Transocean Offshore Inc. for a hidden dividend received 10 years ago because the entity distributing the dividends had disclosed incorrect information. However, no tax penalty could be levied on the reassessed amount.
Norwegian rules for access to reassessments
If a taxpayer has submitted correct and sufficient information to the NTA, the NTA only has authority to reassess the taxpayer's tax return two years back from the end of the income year. If the submitted information is either incorrect or insufficient, the limit is extended from two years to 10 years.
However, while a foreign shareholder of a Norwegian company may be subject to withholding tax on dividends from Norwegian companies, the foreign shareholder does not have any obligation to disclose information to the NTA on dividends it receives. The duty to disclose information rests solely on the Norwegian distributing entity. As such, because the extent of authority to reassess is based on whether the disclosed information is correct and sufficient, the state of law has been unclear about the authority to reassess foreign shareholders with no obligation to disclose information.
The Supreme Court case – part of the Transocean complex
The Supreme Court case was a part of the Transocean complex, which has resulted in a number of civil and criminal court cases in Norway in recent years.
The hidden dividend in the dispute related to a FX loss that arose on a capital reduction. According to Norwegian company law, a capital reduction is not valid until it is registered in the Norwegian Register of Business Enterprises (NRBE). However, the company paid out the capital reduction (partly through issuing a promissory note) after the creditor notice period had expired in December 1998. While the capital reduction was resolved in NOK, it was paid out in USD at the exchange rate at the date of payment. Approximately four months later, in April 1999, the capital reduction was registered at the NRBE. In the meantime, the USD/NOK exchange rate had increased, and the capital reduction was at the time of registration worth $12.7 million less than at the time of payment.
The company argued that the promissory note imposed an obligation on the company to secure Transocean Offshore Inc. against FX fluctuations in the period between the promissory note and the actual execution of the capital reduction at an amount that was fixed in NOK. On this background, the company claimed a deduction for the FX loss. Several years later, the NTA notified the company that the deduction would be denied because the NTA considers the FX change in the period from December to April to be a hidden dividend. However, the company had liquidated by the time of reassessment. In 2009, the NTA decided to impose withholding tax on Transocean Offshore Inc. for the hidden dividend.
The first question for the Supreme Court to decide on was whether the NTA in 2009 had the authority to reassess the foreign shareholder's tax assessment for 1999 and impose a retrospective withholding tax on the hidden dividend. As a foreign shareholder does not have a duty of disclosure towards the NTA, the question was whether the foreign shareholder would always be protected by the two-year rule (applicable for taxpayers which have not submitted incorrect or incomplete information), or whether the foreign shareholder should be open for reassessment as far back as 10 years when the distributing entity – the one responsible for disclosure – had submitted incorrect or incomplete information.
The Supreme Court found that the foreign shareholder must be identified with the distributing entity. Thus, incorrect or insufficient information given by the distributing company will extend the period for reopening the assessment for a foreign shareholder. In the Supreme Court's view, this followed from the system of the law.
The Supreme Court then had to decide if the distributing entity had submitted incorrect or insufficient information. In an attachment to the tax return, the taxpayer had written that it was legally obliged to pay the USD amount of the capital reduction fixed at the time of the promissory note. The Supreme Court found that this information was incorrect pursuant to Norwegian company law, and thus the access to reassess was extended to 10 years.
Finally, the Supreme Court had to decide whether the foreign shareholder could be subject to a 60% tax penalty for the incorrect information given by the distributing entity. On this point, the Supreme Court disagreed with the NTA and did not find any justifications for identifying the distributing company and the foreign shareholder and overruled this part of the reassessment.
Daniel Herde (firstname.lastname@example.org) and Trond Eivind Johnsen (email@example.com)
Tel: +47 482 21 973 and +47 901 94 496