The background motivation for the proposal is to: prevent tax-motivated adaptions when investing in foreign combination funds (owning at least one share) which primarily invest in interest bearing securities, which under existing rules are fully considered as share income and thus covered by the participation exemption method and the shareholder model with various tax benefits; prevent economic double taxation of interest income for personal unit holders in collective investment funds; and simplify the tax rules for collective investment funds.
The most important changes are: all collective investment funds will be taxed according to the same rules; all collective investment funds are covered by the participation exemption method; classification of the unit holder's type of income and tax liability will be determined by the split of share interest and interest income in fund; and the total share interest in the fund must be determined and reported annually.
The Ministry proposes that collective investment funds must report the fund's share interest annually to the tax authorities. If the share interest is not reported and the unit holders do not report their share interest, all distributions from the fund will be treated as interest income for the unit holders and currently taxed at 27%.
The consultation period is set to end on July 14 2015. The rules are proposed to enter into force from the fiscal year 2016.
Taxation of the collective investment fund
Collective investment funds shall remain as a separate tax subject and shall, as a general rule, follow the tax rules applicable to companies. However, the special rule that collective investment funds are exempt from tax on capital gains and are not entitled to deduct losses on realisation of shares in companies domiciled in countries outside the EEA is proposed to be continued.
As under current rules for bond funds, distributions of interest income to the unit holders will be entitled to tax deductions for the fund. The part of the distributions that will be considered as interest income will be calculated based on a proportionate rate depending on the ratio between the values of the share investments and the other investment in the fund.
Today, only share investment funds are covered by the participation exemption method. The Ministry proposes to change the rules and include all collective investment funds under the participation exemption method.
This means that funds will be able to minimise or avoid tax in the fund by making sufficient distributions of deductible interest income to the unit holders.
Taxation of unit holders
Taxation of unit holders will depend on classification of income from the fund. The classification will be defined as follows:
- Distributions from collective investment funds with more than 90% share interest will be taxed as dividends.
- Distributions from collective investment funds with less than 10% share interest will be taxed as interest income.
- Distributions from collective investment funds with a share interest between 10% and 90% will be split between dividend and interest income calculated on a pro rata basis based on the share interest in the fund.
This means that unit holders mainly will be taxed as if they had made a direct investment in the same instruments.
It is proposed that the fund must report, on an annual basis, information to the tax authorities that is necessary to determine the portion of share interest in the investment at year-end. If the fund does not file the information, the unit holder must document the share interest. If sufficient documentation is not filed, the distributions will be taxed as interest income (at 27%) irrespective of the nature of the distribution from the fund. If documentation is only missing for an investment in an underlying fund, that investment will be considered as other securities rather than shares.
The Ministry does not specify whether the fund will be able to deduct distributions reclassified from dividends to interest income if the reporting duty is not met. It must be assumed that this will apply, but this should be clarified by the Ministry.
Non-Norwegian investment funds
The proposed new rules will also apply to foreign investment funds, although the tax treatment in many cases will be different from Norwegian funds as the proposal involves Norwegian-specific tax rules.
This causes various differences and challenges. The foreign funds will, to a large extent, be exempt from tax liability (for instance Sweden, Denmark, Ireland and Luxembourg) and there will therefore not be any tax consequences for the fund as a result of transactions or distributions. This is in contrast to Norwegian collective investment funds with interest income where distributions to unit holders must be carried out to prevent taxable income in the fund.
Accordingly there will still be a difference between Norwegian and foreign funds, where the Norwegian fund must make distributions, while the foreign fund may be accumulating also for interest income. This implies that certain foreign funds will retain favourable outcomes compared with Norwegian funds because the taxation of interest income may be deferred when investing in foreign funds.
In regards to the terms of reporting, it might be challenging to get access to sufficient information and documentation about the split between the funds' investments in shares and other securities at the correct time as it will mainly be Norwegian unit holders who are interested in such information.
General tax reforms to come? The Scheel Committee's report
The Norwegian Ministry of Finance appointed a committee to assess the Norwegian corporate tax regime and the committee provided its report in late 2014. The report included several proposals for changes. It remains unclear as to whether the report will lead to tax reform in Norway but the Ministry of Finance has announced that they are working on proposing a tax reform package during the autumn of 2015.
The main proposal from the Scheel Committee is to reduce the corporate income tax rate from 27% to 20%. To maintain neutrality to capital gains tax and the general tax rate on net income, the committee also proposes to reduce the rate for these incomes to 20% as well. Accordingly the cost of implementing such reform is very high and the committee proposes a high number of tax increases to finance the reduced tax rates mentioned.
Proposed changes to the taxation of cross-border income from shares
The Scheel Committee proposes important revisions of the rules concerning taxation of cross-border income from shares, including important modifications of the participation exemption method and the removal of withholding tax on dividends paid to normal-tax jurisdictions.
The Scheel Committee proposes extending the participation exemption method to also apply to shareholdings of less than 10% in companies' resident normal-tax jurisdictions outside the EEA ('portfolio investments'). Furthermore, the committee proposes revoking the two-year ownership period requirement. In addition, the committee proposes that no withholding tax should be imposed on outbound dividends as long as the recipient is not resident in a low-tax jurisdiction.
Proposed amendments of the interest deduction limitation rule
The Scheel Committee's proposed changes entail an extension of the current interest deduction limitation rule. The committee proposes changing the basis for calculating the deduction limit from the current taxable EBITDA to taxable EBIT. Furthermore, it suggests changing the deduction limit multiple from 30% to 45%. The threshold value is to be reduced from net interest expenses of NOK 5 million ($650,000) to NOK 1million. Under existing rules, only internal interest expenses may be disallowed. The committee proposes that external interest expenses can also be subject to deduction disallowance. This may have a very negative effect, especially for companies in a start-up phase with considerable debt and companies that cannot transfer their taxable profits within a group.
Measures to protect the corporation tax base and prevent shifting of profits to low-tax countries
The Scheel Committee assumes that its proposal to reduce the corporate tax rate from 27% to 20% will reduce the incentive to shift profits to more favourable tax regimes. To ensure that the new model is robust, the committee nonetheless proposes a number of measures to protect the corporate tax base, including introducing withholding tax on interest and royalties.
Specific proposals for financial services
The Scheel Committee stated that the specific tax deduction for insurance companies for security reserves should be assessed. The Ministry of Finance has reacted on this and issued a public consultation process, which is addressed below.
The Scheel Committee has proposed to impose VAT on non-interest income. The rate is not explicitly mentioned.
Additionally the committee suggests imposing a specific duty on interest margin. The duty is technically quite similar to a VAT.
Tax on asset management activities (carried interest)
So-called carried interest payments are an issue that has been brought before the courts in Norway. Borgarting High Court has decided that (part of) the carried interest payments in the case in question were to be considered as personal income for the principal employers. Hence, the taxation was quite extensive. The decision has been appeled to the Supreme Court, which has decided to admit the case to be heard.
Further, with regard to fund structures and whether or not a fund is to be considered as a foreign partnership, the Norwegian Tax Directorate has issued a statement that a fund set up with a general partner (GP) having less than 1% ownership can be regarded as a partnership under the Norwegian Tax Act. Previously, the Norwegian Tax Authorities held the general view that a fund where the GP has less than 1% ownership is not to be considered as a partnership under Norwegian law. The Tax Directorate now states that there are three main conditions for being considered as a partnership:
- The fund must have an economic activity;
- The economic activity must be carried out for two or more partners with common account and risk; and
- At least one partner must have an unlimited liability for the funds obligations.
Proposed changes in the Norwegian Tax Act due to Solvency II – tax increase for insurance companies
On May 21 2015, the Norwegian Ministry of Finance issued a proposal for changing the Norwegian Tax Act section 8-5 with regard to the right to deduct security reserves for insurance companies. The changes are proposed due to the EU's Solvency II Directive, which will come into force from 2016 to harmonise EU insurance regulation. The Ministry of Finance proposes to change the tax regulation to be in line with the Solvency II regulation allowing tax deductions limited to the technical reserves.
According to the current tax regulation, insurance companies can deduct all security reserves that the company considers 'necessary'. The proposed regulation suggests that only security reserves that are in line with the technical reserves under Solvency II shall be deductible for tax purposes.
Accordingly, previously deducted reserves exceeding the security reserves under Solvency II have to be recognised as taxable income at the hand of the insurance company at the time Solvency II is put into force in 2016. No transitional rule is proposed. Consequently, insurance companies holding high security reserves will receive a tax bill for the income year 2016. There is still scope for the tax regulation to be put into force in a manner other than that which has already been proposed, because the deadline for presenting comments under the consulting process is not until July 2 2015.
|Bodil Marie Myklebust|
Bodil is a lawyer in PwC Tax and Legal services where she has been employed since she finished law school in 2007.
Bodil is a member of the financial sector group in PwC Norway. Clients include both domestic and international financial institutions and private and publicly owned companies.
Bodil is responsible for FATCA advisory services in PwC Norway. She has extensive experience working with national and international taxation and corporate law questions, including on structuring. She also has extensive experience in M&A transactions both in terms of assistance with due diligence and preparation of contracts in connection with the transactions.
In addition to her law degree, Bodil holds a master's degree in accounting and auditing from NHH and a diploma in international financial law from London.
Bodil has also worked on FATCA projects at PwC in New York.
|Stian Roska Revheim|
Stian Roska Revheim is a Norwegian lawyer and partner at PwC. Stian has 13 years of experience and has also spent time working for the tax authorities.
Stian is a member of the financial sector group in PwC Norway. Clients include international and domestic insurance companies, banks and other financial institutions as well as private and publicly owned companies.
He works mainly with tax and regulatory questions related to financial institutions, including those relating to:
Dag Saltnes is a Norwegian lawyer and has more than 25 years of experience as an adviser for clients in the financial services sector, among others. His international and domestic clients include insurance companies, pension funds, banks, asset managers, private equity funds, publicly-owned enterprises, quoted enterprises and private companies.
Dag is the leader of the financial services group (covering banking, finance and insurance) with PwC Tax and Legal Norway. The FS tax services include corporate tax, tax compliance and reporting, VAT, legal and regulatory requirements.
He has headed up PwC teams on many restructuring projects for insurance companies in recent years, including cross-border mergers and transactions as well as cross-border marketing of insurance products. Dag has also been in charge of tax compliance and tax reporting engagements for Norwegian insurance companies.
Dag is also a member of the management committee at PwC Norway Tax and Legal, managing more than 180 professionals working across nine offices.