Silje Svanes Jensen and Jan Reidar Øverland
Silje Svanes Jensen and Jan Reidar Øverland of PwC report on corporate taxation and the taxation of corporate shareholders. Special attention is given to international tax issues.
In general the rules concerning corporate taxation and taxation of corporate shareholders have been fairly constant over several years. The tax rate of 28% has stayed unchanged since 1992.
However, in 2004 the tax regime for taxation of corporate shareholders was altered substantially when the exemption method was introduced.
The exemption method
The main rule is that dividends and capital gain on shares are taxable income. However, by introduction of the exemption method, dividends and capital gains on shares are exempt from taxation on certain conditions. The exemption method prevails for incorporated companies and other companies as listed in the General Tax Act (GTA) Section 2-2 (1) letter a-d and Section 10 – 40 (1). The rules differ for shareholding in a company resident in another European economic area (EEA) country and for shareholding in a company resident outside the EEA.
Shareholding inside the EEA
Shareholding inside the EEA is exempted if the underlying tax rate at least equals two-thirds of the Norwegian effective tax rate. If the underlying tax rate is lower than two-thirds, dividends and capital gains will only be exempt if the foreign company meets the substance requirements. The substance requirements imply that the company takes part in local business life on a regular and permanent basis, has a local office and furniture at disposal, and has permanent employed management and other personnel with occupational qualifications, necessary competence and authority to perform business activity, and which in fact make the relevant decisions. Further, the activity must have economical substance with income from the company's own activity.
Shareholding outside the EEA
Shareholding outside the EEA is tax exempt provided that a company has at least 10 % ownership interest and at least two years holding period for the shares. In addition, the underlying tax rate must equal at least two-thirds of the effective Norwegian tax rate.
The 3 % rule
For all dividends and capital gains exempt from taxation according to the exemption method", there is a requirement to include 3% of the exempted income as taxable.
The purpose of this 3% rule is to eliminate owners' costs related to the shareholding. The 3% represents a deemed cost which is not deductible.
Dividend distribution from Norway
Dividends distributed from Norwegian incorporated companies to shareholders, resident within the EEA, are exempt from withholding tax provided that the shareholder meets the above mentioned substance requirements.
Controlled Foreign Companies (CFC) taxation
CFC-taxation implies that the shareholder of a foreign company is taxed on a yearly basis for its proportionate share of the income in the affiliated company.
The shareholder is taxed independent of any dividend distribution. If a shareholder has been CFC-taxed according to the below rules, dividends received will not be taxable.
The shareholding has to be in a company incorporated in a low tax country; so less than two-thirds of effective Norwegian tax rate as for the exemption method. The total Norwegian ownership interest has to be at least 50%.
The rules differ for the holding of shares inside and outside the EEA and also for tax treaty countries and not tax treaties countries. For tax treaty countries CFC-taxation is only relevant if the income is predominantly of passive character (financial income, rental income, royalties etcetera)
Inside the EEA, no CFC-taxation will take place if the income is of non passive character, (ref. above) or if the company meets the substance requirements. If the non passive income test is met, but not the substance requirements, dividends will be taxable when distributed, and any capital gain from realisation will be taxable income.
Norway adheres to the arm's-length principle and the GTA contains a direct reference to the OECD Transfer Pricing Guidelines. Norwegian tax authorities maintain a high focus on transfer pricing illustrated by the number of court decisions regarding various intra-group transactions (for example; management charges, royalties, R&D, captive insurance, thin cap, interest rates, cash pool arrangements, various fees and commissions, business restructurings, etcetera). It is not possible to provide new information or documentation to the courts compared to the basis for the final assessment. Consequently, the tax authorities have won a significant number of the transfer pricing cases.
Formal transfer pricing documentation requirements were implemented from 2008 onwards in Norway. The deadline for submission of such documentation is 45 days after a formal request by the tax authorities. Failure to provide the required documentation may lead to assessment by estimation, limitations in the right to appeal the assessment (consequently also the right to provide new information/documentation in an appeals process).
With the increased focus on transfer pricing there is also a development towards a higher focus on Mutual Agreement Procedures under the tax treaties as an alternative or supplement to litigation.
Cross-border mergers and demergers
In June 2011, Parliament passed several legal amendments related to rules regarding tax-exempt reorganisations. In general, the amendments involve widening of the opportunity to carry out reorganisations without immediate taxation.
The Limited Liability Companies Act has, since 2007, contained rules which make it possible for a Norwegian limited liability company to merge with corresponding companies established within the EEA. However, such cross-border mergers have previously not been exempt from tax, and have thus been subject to full taxation, unless the Ministry of Finance pursuant to an application has granted tax relief.
It is now possible for Norwegian companies to merge with limited liability companies, resident within the EEA as acquiring companies, without immediate taxation of the company and the shareholders.
Correspondingly, Norwegian limited liability companies are able to demerge without immediate taxation of the company and the shareholders if the acquiring company or companies are resident within the EEA.
However, in the event that assets or obligations belonging to the Norwegian company or companies are transferred out of Norway, each asset will be subject to taxation of gains. The latter will typically be the case if the assets and obligations of the Norwegian company are not transferred to a permanent establishment in Norway prior to the merger or demerger.
A merger between a Norwegian acquiring company and one or more limited liability companies resident within the EEA can also be carried out without immediate taxation, if the transaction is carried out pursuant to principles for fiscal continuity applicable in the state where the assigning company is resident. Corresponding rules apply for a demerger of a limited liability company resident in an EEA state if the acquiring company is resident in Norway.
Cross-border mergers and demergers, as described above, will not be tax exempt if one or more of the companies, which take part in the merger or demerger, are resident in a low tax country within the EEA and if the company or companies do not fulfil the substance requirements.
Allocation of gross remuneration – the Allseas judgment
In a Supreme Court judgment form June 2011, the Swiss company, Allseas Marine Contractors (Allseas), lost a case against the tax authorities regarding allocation of gross remuneration to its Norwegian permanent establishment. Allseas had been hired to lay pipelines on the Norwegian continental shelf, an activity that resulted in a taxable presence based on the Petroleum Tax Act (PTA). The question was whether a portion of the gross remuneration related to the work performed on the Norwegian continental shelf should be allocated to the main office in Switzerland, and thus not be subject to taxation in Norway. The Supreme Court said that the full gross remuneration was subject to taxation pursuant to the PTA, as the remuneration was payment for the pipe laying and not anything else. The pipe laying was indeed dependent on functions performed by the main office. However, it was the actual pipe laying the contractors paid for. The functions of the main office was characterised as supporting activities and, according to the Supreme Court, supporting activities will also be subject to taxation pursuant to the PTA, even if they are carried out outside the geographical limitations of the PTA. Thus, the full gross amount of the contract is tax liable to Norway pursuant to the PTA. Based on the ruling, tax payers with activity on the Norwegian continental shelf must be prepared to report gross revenues, and accept limitations in their deductions ( based on the 365-day rule).
Dependent agent – the Dell judgment
In March 2011 Borgarting Court of Appeal gave judgment in a case filed by Dell Products (Europe) BV (Dell Products). Dell Products, which is tax resident in Ireland, had entered into a commissionaire agreement with its related company Dell AS in Norway. The question was whether Dell Products had established a permanent establishment in Norway through Dell AS. The tax authorities argued that Dell AS in fact was a dependent agent of Dell Products. The court found that article 5.5 of the Norwegian-Irish tax treaty should be interpreted in a functional manner and that it was not a condition that the contracts in fact were concluded in the name of Dell Products. With reference to paragraph 32.1 in the OECD commentary, the Court stated that the question is "whether Dell Products, in reality, is bound by the contracts that Dell AS concludes with its customers". The court found this to be the case. The French Zimmer case was discussed by the court, but found to be irrelevant as the French Supreme Court was unable to take 32.1 into account. The judgment has been appealed to the Supreme Court and accepted for hearing.
Proposed and feasible changes in the tax legislation
The 3% rule
The government has announced that it is considering repealing the rule concerning taxation of 3% of capital gains derived from sale of shares. 3% of dividends received will, however, still be subject to taxation.
Depreciation of certain assets in industrial plants
The courts have in two recent judgments considered whether certain assets in aluminum works shall be depreciated in the asset group for machines with a depreciation rate of 20%, or the asset group for plants/works with a depreciation rate of 4%. The Ministry of Finance is of the opinion that neither the depreciation rate of 20% nor the depreciation rate of 4% reflects the economic life of these assets. The Ministry of Finance has announced that it will work on the different problems related to depreciation rate for certain assets in industrial plants, and that this issue will be addressed in the budget for 2012.
Proposed changes in the Svalbard Tax Act
The Kingdom of Norway extends beyond the mainland and the territorial waters to certain offshore locations such as Svalbard (Spitsbergen). The Norwegian supremacy is codified and granted pursuant to the Svalbard Treaty of 1920, subject to certain limitations. Through the treaty, Norway may impose and collect, for example, income taxes from persons and companies resident on Svalbard.
Residents of Svalbard are treated as non-residents of Norway, and Svalbard is not covered by any tax treaty that Norway is party to. As of today the statutory corporate tax rate is 16%. To reduce the likelihood of Svalbard becoming a tax haven, the Ministry of Finance has issued a sounding paper suggesting legislative changes in the Svalbard Tax Act to mitigate the use of Svalbard in tax efficient structures. The suggested changes include increase of statutory tax rate to 28% for non-Svalbard related profits and the application of a 20% witholding tax on dividends.
Silje Svanes Jensen (firstname.lastname@example.org) and Jan Reidar Øverland (email@example.com) of PwC