Norwegian Tax Appeal Board rules that not all company benefits are taxable

In a decision published on January 13 2023 (case SKNS1-2022-74), the Norwegian Tax Appeal Board concluded that a benefit was not taxable when the company in question had acquired a receivable from a group company at a discount to face value. The income was not considered taxable since there was not a sufficient close and immediate connection between the benefit and the company’s income-generating business activities.

The Norwegian taxpayer (a limited company) was part of a foreign group of companies and engaged in recruitment and consultancy services. Another group company had purchased an IT system from a third group company. The receivable that arose was first transferred to a fourth group company, which transferred it on to the taxpayer at a discounted price. The difference was accounted for as other financial income that increased the equity of the Norwegian company.

The taxpayer argued that the discount value did not reflect the risk or inability to pay on the part of the debtor, which was the group parent company. The purpose of the transfer was only to capitalise the taxpayer as the equity in the company had been lost. This method was said to be chosen for practical reasons, instead of a capital contribution, since the transferor was a sister company that did not hold shares in the Norwegian company.

The case is an atypical one in which operating support/a capital contribution is given by allowing a group company to acquire an asset (receivable) at a discounted price. Each group company is a separate taxpayer and the basis for the Norwegian taxation is the actual form of the arrangement.

For an income to be taxable, there must be a benefit that has been caused by one of the sources of income mentioned in the Norwegian Tax Act, Section 5-1 (labour, capital, or business activities). The parties agreed that the discount value constituted a benefit and that the taxpayer conducted business activities. The disagreement concerned whether there was a sufficient close and immediate connection between the business activities and that income benefit.

The causation requirement implies that the benefit must have been caused by the income-generating business activities. In legal theory, a condition of a close and immediate connection between income and income-generating activities has been established. The benefit must be a close and immediate consequence of the features that characterise the sources of income obtained by the company in each case.

The Tax Appeal Board concluded that the sole purpose of transferring the receivable at a discounted value was to capitalise the Norwegian company. This transaction was enabled because of the community of interest in the group. The benefit did not have any connection to the company’s recruitment and consultancy business (neither the core of it nor a natural part of it). Therefore, the requirement that the benefit must be ‘caused by’ one of the above-mentioned sources of income was not met and the benefit was not considered taxable.

It was made clear that the decision of the case only applied to the benefit that arose due to the transfer at discounted value in the year of transfer and not the tax treatment of a later collection/realisation of the receivable.

In Deloitte Norway’s view, if the discounted value is not considered a benefit within the meaning of the Norwegian Tax Act, neither should a later realisation of the receivable constitute a new taxable benefit. Likely, such benefit would, in any case, be considered related to a simple receivable realised outside the taxpayer’s business, which is tax exempt under Norwegian tax law.

The Tax Appeal Board decision shows that not all benefits a company enjoys are taxable business income. However, normally this should be the case. For a company engaged in commercial business activities, there is a low threshold for considering there to be a close and immediate connection between the benefit and the company’s income-generating business activities.