Withholding tax on dividends from Norwegian companies to Irish common contractual funds
Meron Ghebremicael and Lene Bergersen of Deloitte Norway explain a recent decision by the Tax Appeal Board regarding Irish common contractual funds’ eligibility under the Norwegian participation exemption method.
On February 15 2023, the Norwegian Tax Appeal Board repealed the decision to refuse a refund of withholding tax to an Irish common contractual fund (CCF).
The Tax Appeal Board disregarded a previous statement from the Ministry of Finance that Irish CCFs were regarded as tax transparent for Norwegian tax purposes and instead found that the Irish CCF was comparable to a Norwegian entity covered by the Norwegian participation exemption method. The taxpayer was therefore entitled to a refund.
The Tax Appeal Board reiterated – in accordance with the Supreme Court judgment in the case of Statoil Holding (Rt. 2012 p. 1380) – that it is the Norwegian classification of the fund that is important when determining whether it is comparable to a Norwegian entity, not its classification in Ireland.
Considering Statoil Holding and more recent practice, the Tax Appeal Board observed that the statement from the Ministry of Finance emphasised factors that seemed to be of less importance for the comparability assessment today. Thus, it reached a different conclusion.
A CCF is an unincorporated body established by an Irish management company pursuant to which investors participate and share in the underlying investments of the CCF.
The fund can be established as an undertaking for collective investment in transferable securities (UCITS) pursuant to the Irish European Communities Regulations 2011, or as an alternative investment fund. In this case, the fund was established as a UCITS, and organised as an open-ended co-ownership.
The sub-funds received NOK 855,221 (approximately $80,000) in dividends from Norwegian public limited companies and were subject to a withholding tax rate of 25%, which corresponded to NOK 213,805. The sub-funds applied for a refund of the full amount under the Norwegian participation exemption method, which was denied by the Norwegian tax office, because it viewed the fund as being tax transparent for Norwegian tax purposes and therefore not entitled to a refund.
The decision was appealed and later repealed by the Norwegian Tax Appeal Board.
The Norwegian participation exemption method
As a starting point, dividends paid to foreign shareholders are subject to withholding tax at 25%. However, the dividends are exempt from withholding tax under the Norwegian participation exemption method if certain requirements are met.
In order for the dividends to be exempt from withholding tax, the fund must:
Be comparable to a Norwegian entity entitled to the Norwegian participation exemption;
Be tax resident in a European Economic Area (EEA) country; and
Be regarded as genuinely established and conducting real economic activity (the substance test).
There must also be an agreement enabling the request of information between the state of residency and Norway.
Assessments by the Tax Appeal Board
The Norwegian Ministry of Finance has previously stated that Irish CCFs should be treated as tax transparent for Norwegian tax purposes (UTV-2007-1858). The tax office felt bound by this statement. Consequently, the CCF was not regarded as comparable to a Norwegian entity covered by the participation exemption method.
The Tax Appeal Board, however, considered Statoil Holding and more recent practice. As a starting point, the classification of whether the fund is regarded as a separate taxpayer (meeting the comparable test) or tax transparent is carried out in accordance with Norwegian law. Key factors in the assessment are the liability structure, decision-making authority, and the investors’ rights and obligations in the fund. Against this background, the Tax Appeal Board carried out a detailed analysis of how the CCF was structured.
It was found that investors in Norwegian mutual funds (covered by the Norwegian participation exemption method) and Irish CCFs have limited liability for the fund’s obligations (limited to the invested amount), an argument that was considered decisive in the Statoil Holding judgment. Accordingly, the Tax Appeal Board concluded that the Irish CCF was comparable to a Norwegian entity covered by the participation exemption method.
With regard to the requirement of being tax resident in an EEA country, a CCF can be characterised as a hybrid fund, a separate taxpayer in Norway, but transparent for tax purposes in Ireland. The tax resident requirement does, as a starting point, refer to the domestic law of the other state, which creates challenges for hybrids that are not resident pursuant to the tax rules in the other state (i.e., tax transparent).
Previously, these were considered not to be covered by the participation exemption method, but this has been moderated as a result of Statoil Holding and more recent practice. In a Ministry of Finance statement from 2015 (UTV-2015-721), it was considered sufficient that the hybrid is established in accordance with company law in the EEA state. The CCF therefore also fulfilled this requirement.
The connection to an EEA country was considered evident through the management company, which was carrying out the investment activity and acted on behalf of the fund. The management fund and custodian were based in Ireland. Accordingly, the Norwegian Tax Appeal Board concluded that the fund was considered tax resident in an EEA country.
Lastly, the CCF was found to fulfil the substance test. Formerly, the requirement was interpreted strictly under Norwegian tax law, as a result of a statement in the preparatory works to the Norwegian Tax Act which created uncertainties with regard to whether foreign funds could be considered genuinely established.
However, a statement from the Ministry of Finance and subsequent administrative practice have indicated that it is sufficient that the management company of the investment fund meets the substance requirement on behalf of the fund, which is in line with interpretations from the European Court of Justice.
Therefore, the Norwegian Tax Appeal Board concluded that the fund had sufficient substance through the management company, which was genuinely established and conducted real economic activities on behalf of the fund in Ireland.
All the requirements for applying the Norwegian participation exemption method were fulfilled, meaning that the dividends should have been exempt from withholding tax. The taxpayer was therefore entitled to a refund of the full amount.
Besides clarifying that Irish CCFs should be entitled to the Norwegian participation exemption method if meeting the above criteria, the decision also indicates that some older legal sources (regarding the participation exemption method) should no longer be given weight.