General tax principles
The Norwegian Corporate Income Tax (CIT) is based on a flat tax rate of 27% on net profits. Tax losses can be forwarded against future profits for an indefinite period of time. The company's worldwide income is taxable in Norway, usually with a credit for taxes paid in other jurisdictions depending on the various tax treaties.
The tax exemption method (TEM) reduces the tax rate to zero or 0.81% depending on the circumstances for corporations on received dividends and capital gains on disposal of shares regardless of the level of participation and period of ownership. TEM is also applicable for shareholding in foreign companies with specific criteria for low tax jurisdictions and companies located outside the EU/European Economic Area (EEA).
The Norwegian tax exemption method (TEM)
Under the tax exemption rules, corporate shareholders are generally exempt from tax on dividends received and capital gains on qualifying shares and on derivatives where the underlying object is qualifying shares. Correspondingly, losses on shares are, in general, non-deductible.
All operational expenses related to exempt income from shares are fully tax deductible. To limit the benefit of these deductions, the TEM is, with some exemptions, limited to 97% for received dividends, and the remaining 3% is taxable for Norwegian corporate shareholders (at a 0.81% effective tax rate). The 3% taxable income is calculated on dividends. Dividend distributions within a tax group (where the ultimate parent company directly or indirectly owns more than 90% of the shares and voting rights) are fully tax exempt. There is no tax on capital gain on disposal of shares.
In addition, the TEM also may apply for capital gains on qualifying partnership units and, on certain conditions, to foreign-resident companies with taxable activity in Norway (3% of the income taxable at 27% with an effective tax rate of 0.81%). Distributions from partnerships are not recognised as taxable income for corporate partners, but will be included in the bases for calculating the 3% income. Participants of the partnership may, as the subject for tax of the partnership's income, also utilise the TEM for its part of the relevant share income received by the partnership.
Note that an investment in a company resident in a low-tax country in the EEA has to fulfil certain substance requirements to qualify for the tax exemption rules. These requirements are intended to be in line with the substance requirements of the European Court of Justice's (ECJ's) decision in Cadbury Schweppes. A country is considered a low-tax country if the level of effective taxation is less than two-thirds of the tax that would have been due if the foreign company had been resident in Norway. This is the same test used for the controlled foreign company (CFC) regime. The Directorate of Taxes has published a non-exhaustive list of low-tax jurisdictions (black list) and non-low-tax jurisdictions (white list).
However, for investments outside the EEA, the exemption applies only if a shareholder owns 10% or more of the share capital and the voting rights of the foreign company for a consecutive period of two or more years. To be able to deduct losses on the realisation of shareholdings outside the EEA, the shareholder and/or a related party may not own 10% or more of the share capital and the voting rights of the foreign company in the two-year period before the realisation. For dividends, the holding period of two years does not have to be met when dividends are distributed, but can also be met after the ex-dividend date.
Shareholdings in low-tax countries outside of the EEA do not qualify for the TEM.
Acquisition and sales related costs (for example, broker fees) must be added to the cost price of the shares for tax purposes. Costs incurred to manage acquired tax-exempt shares are, however, tax deductible.
Norway's internal tax rules do not allow taxation of a non-resident's capital gain on the disposal of financial instruments, including shares in Norwegian companies, unless the non-resident has a permanent establishment (PE) to which the financial instrument may be allocated.
Investing in partnerships or transparent entities (such as German KGs or Luxembourg FCPs) and investments made by such entities must be considered on a case-by–case basis. The Norwegian Ministry of Finance has issued opinions regarding hybrid entities. The Norwegian classification of partnerships and transparent entities is based on certain criteria which in many cases are different from classification locally. The tax authorities' opinion – which in our view may be challenged – is that all investors in a hybrid entity investing in a Norwegian company must qualify for the TEM in order to be comprised by the rules. Additionally an investment made by a Norwegian company in a hybrid entity requires that all income received by the hybrid entity must derive from the EEA to qualify for the TEM.
Life insurance companies and pension funds are excluded by the TEM for the assets allocated to the policy holders. This applies for the licenced entity and indirect investments through tax transparent entities, but not subsidiaries. The reasoning is to avoid double deductibility as the income of such assets will be tax deductible for the allocation to the technical reserves.
According to internal rules there is no withholding tax paid on interest and royalties from a Norwegian entity.
Withholding tax on dividends is, as a starting point, 25%, but exemptions apply for shareholders within the EEA and applicable tax treaties. For corporate shareholders located in the EEA the withholding tax as a main rule is zero due to the TEM. This applies also for pension and in many cases also investment funds.
Foreign life insurance companies and pension funds will in our view be in position to obtain the most favourable withholding tax position and be regarded as other corporate entities regardless of the exclusion of the TEM as mentioned above. This is because the foreign entities do not enjoy the tax deductibility for allocation to the technical reserves. The opinion of the tax authorities is not yet known.
A list of the various rates in the tax treaties may be found at www.taxsummaries.pwc.com.
Withholding tax at the correct rate may be deducted from the dividends by the dividend distributing company provided that the shareholder has submitted documentation for its status. In case of incorrect deduction the shareholder can file a refund claim to the Norwegian tax authorities. The statute of limitation is, according to the tax authorities' opinion, three years. The Norwegian tax authorities have accepted so-called Fokus Bank reclaims and refunded withholding tax and a number of cases are still pending.
Limitation of interest deductibility for intra-group debt
As of 2014, limitations on the deductibility of interest expenses between related parties have been adopted. In general, interest expenses to related parties that exceed 30% of a Norwegian company's taxable income, with some adjustments, will not be tax deductible. The new regulations will only apply to companies that have more than NOK 5 million ($840,000) in total interest expenses and for the whole amount if the threshold is exceeded.
Two parties are related if one party directly or indirectly owns or controls the other party by a stake of at least 50%. Related parties may be resident in Norway or abroad. The interest deductibility limitation is calculated for each entity in the group. Disallowed interest deductions may be carried forward for 10 years.
The limitation applies both to local and foreign companies that have a taxable presence in Norway, as well as partnerships, CFCs and so on. The new regulations will also apply to interest costs on loans entered into before 2014.
Investment funds will for Norwegian tax purposes be classified as either equity (share) funds or bond funds. Balanced or combined funds will be defined as equity funds if the fund owns one share or more.
Equity funds are taxed by a specific section in the General Tax Act where capital gains on all disposals are tax exempt and losses are not deductible. The fund may utilise the TEM on received dividends. Costs are deductible but income on debts (fixed income) and dividends not comprised by the TEM may however become net taxable income for the fund and result in a tax leakage if exceeding the costs.
Bond funds are taxable entities for all income (and will not have any equity instruments), but are allowed to deduct the distributions to the investors.
Tax on asset management activities
Asset managers may face some challenges with regard to Norwegian tax.
A pending court case has temporarily resulted in carried interest to be classified as operational income on the level of the management company and not – as argued by the tax authorities – salary income for the partners of the management company. The decision from the Oslo City Court is appealed to the High Court and the final outcome may have to wait until the Supreme Court has ruled on the dispute.
Assets managers must also consider the Norwegian rules on taxable residence and permanent establishment carefully. The regulatory process in the EU for passporting/cross-border activities applies as a main rule in Norway as well, but the tax rules remain unchanged.
The Norwegian corporate residence rules can be described as follows. Companies that are registered and incorporated in Norway in accordance with Norwegian company law are, as a general rule, regarded as tax resident in Norway and taxable for their worldwide income. If effective management at the board or director level takes place outside Norway, residency in Norway for tax purposes may cease, and the company may be subject to exit taxation. Note that several factors should be considered to determine whether tax residency has moved (for example, other management functions and the overall connection to Norway).
Foreign corporations will be regarded as resident in Norway if the place of effective management is in Norway. The place of effective management will be deemed to be in Norway if, for example, the board of directors makes its decisions in Norway.
The Norwegian PE rules are as follows. A foreign company is liable to tax in Norway when engaged in a business that is either conducted in or managed from Norway. The tax liability is limited to income that is derived from Norwegian sources. As a general rule, non-residents without a PE are not liable for tax on capital gains when selling Norwegian financial instruments. However, when the property has been used in a business that is conducted in or managed from Norway, the capital gain or loss has to be included.
The legislation does not contain a reference to the treaty concepts of "permanent establishment" or "permanent representative". The threshold for tax liability is normally lower under legislation than the taxing right afforded to source states under tax treaties.
With respect to double tax treaties (DTT), the Norwegian tax authorities will, to a large extent, follow the OECD Commentaries when interpreting the relevant DTT, if the wording is similar to the OECD Model Tax Convention.
Tax reform remains on the horizon
The Ministry of Finance has appointed a committee ("the Scheel Committee") to assess the Norwegian corporate tax regime in comparison withforeign regimes. The committee will provide a report with analysis and recommendations in October 2014. It remains to be seen whether the report will lead to a tax reform.
Other relevant issues are, for instance, that there are no specific signals that Norway will introduce a financial transaction tax (FTT). The previous social democratic government announced that the EU development will be monitored closely but the right-wing government as of October 2013 has not stated any opinion yet.
Norway has entered into a FATCA agreement with the US. Norway has entered into tax treaties or tax information exchange agreements with 100 countries (67 double tax treaties and 33 information exchange agreements) and the number is increasing.
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 (Banking, Finance and Insurance) with PwC Tax & Legal Norway. The FS 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 PwC Norway's Tax and Legal Service's Management Committee managing more than 180 professionals working across nine offices.
Stian Roska Revheim
Stian Roska Revheim is a Norwegian lawyer and director at PwC. Stian has 12 years' 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:
Liv Haneberg Lundqvist
Liv Haneberg Lundqvist is an associate lawyer and a director in Advokatfirmaet PwC in Oslo. In addition to her law degree, she holds the degree Executive Master of Management with specialisation in Taxation. This degree includes handling topics such as corporate and business taxation, tax procedures, international taxation, transactions and restructuring, transfer pricing and analysis and methods.
Liv is the leader for Advokatfirmaet PwC's work with the financial services sector in Oslo. Her international and domestic clients include insurance companies and pension funds, banks, asset managers, private equity funds, publicly-owned enterprises, and private companies.
She has more than 14 years of experience in the field of domestic and international corporate taxation. She has extensive experience with providing advice and tax assessment to large and listed multinational groups. Liv is a specialist in taxation of Norwegian investors in private equity funds.
Liv also has 12 years of experience from her time working at the Norwegian tax administration. She has been in charge of the assessment of the largest and leading Norwegian groups in the financial services industry.