Norway: The Norwegian Budget 2012

The Norwegian Government introduced the State Budget 2012 6 October 2011. As part of this budget, the Government proposed amendments to Norwegian tax legislation, Prop. 1 LS (2011-2012). The Tax Department of Arntzen de Besche will in the following give a short summary of some of the proposed changes.

DIRECT TAX

Changes in the 3 %-rule under participation-exemption

Capital gains and dividends on shares in companies earned by shareholders who themselves are companies (corporate shareholders) are in general exempt from normal income taxation in Norway, as only 3 % of such income is subjected to tax at 28% tax rate (effectively 0.84% tax). Special requirements apply for cross border shareholdings outside EU/EEA. This 0.84% tax is sometimes referred to as the "3 % claw-back", as it is motivated by the fact that the shareholder may deduct costs related to the exempted income. The Government states that the complexity of taxing capital gains at 0.84% is disproportional to the revenue raised and proposes the following simplifications:

  • The 3 %-rule shall apply only for dividends, so that capital gains earned by corporate shareholders become subject to zero tax
  • The 3 %-rule shall not apply to corporate shareholders owning more than 90% of the shares, neither for gains or dividends.
  • On the other hand, the 3% rule shall apply for foreign corporate shareholders that receive dividends from Norwegian companies; this will only apply to foreign companies which participate or carry out business in Norway to which their shareholdings are allocated.

Further, it is proposed that the 3%-rule is extended to apply to income earned by corporate owners of partnerships (ANS, DA, KS). Distributions derived by corporate owners in partnerships have previously been totally tax exempt.

The changes shall become effective from 1st of January 2012. Corporate owners of partnerships should in particular be aware of these changes, and consider adjustments before year end 2011.

Restrictions in the right to deduct losses on receivables between related Companies

A company may finance its subsidiaries either by loans or equity. If using a relatively high amount of loan financing, the parent company could deduct the losses on receivables ("bad debt") in cases of an unsuccessful investment while realizing a tax exempt gain on shares where the investment is successful. The Government wishes to abolish this non-symmetric tax treatment and proposes the following changes:

The ability to deduct losses on receivables between related companies shall cease with effect from the 6th of October 2011. The specific details will be elaborated in an administrative regulation passed by the Tax Authorities. It is suggested that such new restrictions on bad debt relief shall only apply within a company group, defined as more than 90% direct or indirect ownership.

Regardless of the above, the losses on receivables shall still be deductible if they are a part of an "ordinary business activity" such as e.g. customer debt, or if it is derived from a previously taxable transaction – such as a sale of an asset from the parent company to a subsidiary.

Termination of the equalization tax

The regulation of equalization tax (also referred to as "correction tax") ensures that profits distributed as dividends to shareholders have been subject to tax on the company's hand before being paid out. The regulations effectively neutralized timing differences between accounting and tax rules. Because dividends to individual physical persons are fully taxable and because such timing differences have generally been reduced, these quite complicated regulations are no longer justified and shall be abolished from 1.1.2012.

PROPERTY TAX

Property tax on power plants

Power plants can be object to property tax by the local municipal tax authority. This tax is assessed within a maximum and a minimum rate based on kWh. The proposition suggests increasing the maximum rate with 5 percent, and another 11 percent the year after. The capitalization rate is also suggested to be increased with 4.5 percent.

Hearing on a new valuation system on property and capital tax

The proposition introduces a new valuation system on how to assess property and capital tax. The system is intended to make the assessment easier. The suggestion will be submitted to a hearing, and most likely passed to the Parliament in 2012.

INDIRECT TAXES

Possible tax on financial services

Financial services are in general exempted from value added tax (VAT). This exemption is referred to as not in line with the underlying principles of the VAT system and creates distortions. To limit the effect of such distortions a committee has suggested implementing an activity tax based on the financial institution's profits and salary costs in order to tax the value created by the financial institutions.

The Ministry of Finance sees the activity tax as a possible alternative to VAT, with the i.a. similar qualities as to neutrality. The government has therefore considered two possible methods to implement an activity tax; the addition-method and subtractionmethod. The basis of taxation according to the addition-method is the sum of salaries and profits which represents the added value of the company. The basis of the subtraction-method is based on the difference between income on one side and goods- and supply efforts on the other side.

The Ministry of Finance states that an implementation of the activity tax is both formally and practically possible. They will continue to elaborate the details and consequences, before presenting a final proposal.

Other changes of indirect tax

  • It is proposed to increase the VAT rate on food from 14 to 15 %.
  • It is proposes to reintroduce the exemption from VAT on the supply of warranty repairs to foreign entities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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