Corporate Income Tax Rate (%) 28 Capital Gains Tax Rate (%) 28 Branch Tax Rate (%) 28 Withholding Tax (%): Dividends to non-resident shareholders 25 Interest 0 Royalties from Patents, Know-how, etc. 0 Branch Remittance Tax 0 Net operating Losses (Years): Carryback 0 Carryforward 10
Resident companies are subject to taxes on worldwide income excluding net income derived from real or industrial property situated abroad. Non-resident corporations are subject to taxes on income attributable to Norwegian business operations.
Companies are considered to be resident in Norway for tax purposes when their effective management is situated in Norway. Consequently, companies that are registered abroad (for instance, in tax haven countries) but operate from Norway may be considered residents of Norway for tax purposes. A company that registers in Norway and establishes the administrative bodies stipulated in the Joint Stock Companies Act (the companies act) is considered to be resident in Norway.
Foreign entities may manage ships from Norway without being subject to Norwegian tax. Norwegian and foreign interests may jointly own a resident international shipping company and operate ships out of Norway without paying tax if the Norwegian ownership does not exceed 34%. In addition, if the company is registered in a tax haven country, both the foreign and Norwegian owners may avoid paying taxes in the country of registration.
Norwegian-Controlled Companies in Low-Tax Countries
Norwegian taxpayers are subject to tax on their proportionate share of the profits of joint stock companies and similar entities if the entities are resident in countries with a tax rate of less than two-thirds of the rate for similar entities in Norway and if at least 50% of the entity's capital is continuously owned or controlled directly or indirectly by Norwegian taxpayers. However, these regulations do not apply to a company resident in low-tax countries with which Norway has a tax treaty if the entity is engaged in a qualified activity, such as production.
The corporate tax rate is 28% for all distributed and undistributed taxable profits. The tax rate consists of a 21% municipal tax and a 7% county tax for the Tax Equalisation Fund.
Taxable income is based on book income shown in the annual financial statements and adjusted for tax purposes. Adjustments include depreciation expense and loss recognition for inventory and accounts receivable.
A dividend is any payment that transfers benefits from a company to its shareholders or owners without fair consideration.
Paid to Resident Shareholders by Resident Companies. A company paying dividends is fully taxed on its income and is not entitled to a deduction for dividends paid. To eliminate the double taxation of dividends, an imputation system has been introduced. Under this system, shareholders that receive dividends paid out of retained earnings are entitled to a credit for the tax levied on the same dividend on the hand of the shareholder.
To qualify for the imputation system, dividends must be paid by a company with ordinary tax liability to Norway and must be paid to a shareholder that is fully taxable on the dividend in Norway. The dividend may be paid only from prior years' earnings. Taxable shareholders that receive dividends from taxable companies are entitled to a credit, regardless of whether the company or the shareholder is actually liable for any tax in the year of the distribution.
Under the companies act, dividends must be approved at the shareholders' annual general meeting after determining that required allocations to the legal reserve fund have been made. Dividends not meeting these requirements are taxable, but do not generate a credit.
If the credit exceeds the tax liability on ordinary income, the excess credit may be carried forward and applied against the tax liability for ordinary income for 10 years.
Paid to Foreign Shareholders. The imputation system is not available to foreign shareholders. Withholding tax of 25% is imposed on dividends paid to foreign shareholders. Consequently, dividends paid to foreign shareholders are generally subject to both company tax and withholding tax. Although this results in a double Norwegian tax, foreign shareholders ordinarily receive credit for the withholding tax on the dividend in their home countries. Reduced withholding rates may apply under tax treaties.
Foreign companies with substantial (usually 25% of the company) direct holdings or participation interests in Norwegian companies may qualify for reduced withholding rates on dividend distributions.
Received from Foreign Companies. Dividends received by Norwegian shareholders from foreign companies are usually taxed as ordinary income at 28%. The tax withheld by the payer's country can ordinarily be credited against the Norwegian tax on the same dividend. A Norwegian parent company is entitled to a credit for underlying foreign tax paid by a foreign subsidiary on the profits from which dividends were paid. To calculate the credit, a computation is made based on the relationship between the subsidiary's after-tax income and the dividend received. The credit is limited to the amount of Norwegian income tax imposed on the dividend. The tax credit is included in taxable income.
The credit is allowed only for the tax the subsidiary pays for the year the dividend is paid. Consequently, no credit is given for tax paid in a previous year.
Capital Gains And RISK Adjustment
Capital gains from the sale of shares or business assets are considered ordinary income, and losses from such sales are deductible from ordinary income.
If non-resident foreign shareholders are not conducting business in Norway, they are not taxed on gains resulting from sales of shares in Norwegian companies. This applies even if an applicable tax treaty grants Norway the right to tax major share transfers.
To avoid double taxation of the gain on transfers of shares of Norwegian companies, Norway has introduced the RISK method. RISK is an acronym for the Norwegian phrase meaning "adjustment of cost price for taxed capital". In computing the gain on transfers of shares of Norwegian companies, changes in the company's taxed capital during the shareholder's period of ownership are taken into account. Taxed capital is undistributed income that has been previously subject to tax at the company level. The original cost of the shares is increased by the net increase or decreased by the net decrease in the company's taxed capital during the shareholder's period of ownership.
Companies calculate changes in taxed capital each year at year-end.
Inventory is valued at historic cost. Goods produced by the taxpayer are valued at direct production cost, which consists of the cost of raw materials and semi-finished goods, production wages, auxiliary items included in the production process and other items. Indirect production costs are deducted separately in the year incurred.
For goods that cannot be separately identified (bulk goods), first-in, first-out (FIFO) valuation must be used to determine the cost of goods sold. As a result, the value of current inventory on the tax balance sheet will always reject the cost of the most recently acquired goods.
Under the Tax Act of 1911, in general, all expenses incurred to earn, maintain and secure income, except gift and entertainment expenses, are deductible. However, some costs must be directly expensed and others, such as the cost of fixed assets, must be capitalised. Intercompany charges based on arm's length terms with satisfactory documentation are fully deductible.
Property, plant, equipment and certain intangible assets are depreciable for tax purposes. Depreciation on fixed assets must be calculated at any rate up to a given maximum using the declining-balance method. Fixed assets are allocated to one of eight different groups. Group A consists of office equipment that has a 30% depreciation rate. Group B consists of acquired goodwill at 30% depreciation. Groups E and F consist of motor vehicles and fixtures and have depreciation rates of 25% and 20%. Groups D and E consist of ships and aircraft and have depreciation rates of 20% and 12%. Groups F and G consist of industrial and office buildings and have depreciation rates ranging from 2% to 10%.
Assets Imported Into Or Exported From Norway
The valuation of an asset imported into Norway is the owner's cost for the asset, adjusted for straight-line depreciation. After importation into Norway, an asset is depreciated using the straight-line method. Depreciation may be computed by the declining-balance method beginning in the fourth full income year after importation or from an earlier date if the taxpayer establishes that the asset will be subject to Norwegian tax jurisdiction for a period exceeding four income years after importation.
A taxable capital gain may result if an asset is exported from Norway within four years (eight years for ships) from the year in which the taxpayer begins to depreciate the asset under the declining-balance method. This capital gain is the difference between the actual depreciation claimed under the declining-balance method and the amount of depreciation allowable if the asset had been depreciated under the straight-line depreciation method. The capital gain is included in income in the year of exportation. This rule does not apply if the asset is reimported into the Norwegian tax jurisdiction by the same owner within one year of exportation.
Accounts receivable should be valued at the historic price, that is, the price recorded at the time of the sale. Bad debt deductions are generally allowed only when losses are realised, which is when accounts receivable are sold or it is clear that an account will not be honoured. This rule applies only to accounts receivable derived from the taxpayer's business.
Non-business claims may not be written off for tax purposes.
In general, reserve appropriations required by generally accepted accounting principles are not deductible. Anticipated expenses from items such as guarantees, returns and repairs on delivered goods are deductible only when the expenses have actually been incurred.
Royalty expenses, licensing fees and other non-trading intercompany charges based on arm's length terms are fully deductible.
Interest expenses are generally deductible if documented.
Foreign Tax Credit
Tax credits for foreign taxes paid may be available under an applicable tax treaty. Norway permits certain tax credits for taxes paid to non-treaty countries. Norwegian taxpayers may claim a credit for foreign taxes paid on income from international shipping and aviation activities if Norway does not have a treaty with the country imposing the tax. Norwegian taxpayers may also claim tax credits for foreign taxes paid on other types of income, subject to approval by the Ministry of Finance on a case-by-case basis.
Losses may be carried forward 10 years. Losses may be carried back two years if they are incurred in the year a company liquidates or otherwise ceases to do business.
Treatment Of Groups Of Companies
Companies are taxed as separate entities; tax consolidation is not allowed. However, a company within a group may transfer funds to another company within the group to benefit from the major advantage of consolidated taxation-offsetting profits and losses of group members. This transfer of funds is allowed only between Norwegian companies. The funds need not be physically transferred.
To transfer funds within Norwegian company groups, a Norwegian parent company must own at least 90% of the subsidiary, and generally both companies must be Norwegian registered companies. Because a company must contribute 10% of its profit to its legal reserve fund and pay 28% ordinary tax on the transfer of profit to the legal reserve fund (28% of 10% = 2.8%), only about 87% of the contributing company's profit can actually be transferred to the receiving Norwegian company.
Transferred funds are taxed to the receiving company only, not to the distributing company. A contributing company obligated to make a group contribution to an affiliated company must report this obligation in its financial statements, and the contribution is deductible on its tax return. The receiving company must report the contribution as income on its tax return.
Norwegian subsidiaries of a foreign parent company or group are also allowed to make group contributions to other Norwegian subsidiaries in the group for tax purposes.
Intercompany transactions should be based on the arm's length principle. It may be difficult to determine the correct price for management fees, royalties or interest. An important factor in determining prices is comparable prices between independent parties.
Investments made through branches of foreign companies often create allocation problems for tax purposes for items such as overhead in intercompany transactions. It is usually simpler to invoice such costs on an arm's length basis to a subsidiary. Intercompany charges are deductible if they are based on actual services rendered.
Special rules apply to allocate both personal income and capital income to active shareholders of joint stock companies.
At liquidation, the joint stock company's net assets are allocated among shareholders according to their ownership interests, and shareholders are taxed according to the RISK adjustment method. The RISK adjustment prevents double taxation of prior and present year earnings in computing the gain on share transfers. The RISK adjustment also imposes tax on the benefit enjoyed by shareholders who acquired their shares at a discount. Deductions are allowed for losses realised by shareholders on liquidation. See Capital Gains and RISK Adjustment.
Royalties And Interest Paid To Foreign Affiliates
Norway does not impose withholding tax on royalties and interest, even if such tax is allowed by a tax treaty.
Companies Leaving Norway
Companies and branches of foreign companies leaving Norway and ceasing to be taxable there must reconcile their gains and losses accounts established for tax purposes. In the year of departure they must include a positive balance in income and deduct a negative balance.
Certain income that has been realised but not received is also included in taxable income in the year of departure from Norway.
Losses may be offset against other income in the year of departure. Unused losses may be carried forward to offset possible future income if the entity is later liable to Norwegian tax. If a taxpayer's tax liability to Norway ceases because the taxpayer is winding up its business activity, losses may be carried back for two years. These loss rules generally apply to all taxpayers when Norwegian tax liability ceases, regardless of whether the entity is a one-person company, a partnership, a joint stock company or an entity taxed as a joint stock company. Foreign branches in Norway, foreign companies and other persons that carry on business in Norway are also subject to these rules.
Non-resident companies are taxed on their income attributable to Norwegian business operations. In general, a non-resident company is subject to corporate tax only if it carries on a trade in Norway through a branch or agency. The trading income earned by the branch or agency is subject to tax at the regular corporate tax rate. The income is not taxed again when profits are transferred abroad.
If a foreign company has a subsidiary resident in Norway the subsidiary is taxed as a resident company. Dividends paid to its foreign parent company are subject to a 25% withholding tax, which may be reduced under a tax treaty.
TAXATION OF PARTNERSHIPS, JOINT VENTURES AND TRUSTS
Partnerships And Joint Ventures
All partnerships, limited partnerships, silent partnerships, joint ventures and other such entities are taxed as transparent entities. The income of a partnership is computed as an entity and then allocated among the partners.
Regulations provide parallel treatment for companies and transparent entities in the following areas:
Calculating taxable income:
- Imposing a 28% tax rate on both company profits and partners' capital income;
- Assessing personal income and capital income; and
- Computing and taxing gains on dispositions of ownership interests.
Transparent taxation applies for income tax and for net capital wealth tax purposes. Income retains its entity characteristics when it is allocated among the partners.
If the partners actively participate in the partnership's business, their personal income derived from the partnership is also determined according to the transparent method. The partnership's net income from activities and capital is allocated as personal income to active partners according to their percentage of ownership in the partnership. Net financial income, such as interest and dividend income, is allocated to active partners as ordinary income according to their ownership percentages. Inactive, or passive, partners report all categories of their share of income as ordinary income only.
Gains on the disposition of an interest in a transparent entity are taxed as ordinary income in the year of realisation. Losses may be deducted from ordinary income. The gain is the difference between the proceeds and the sum of the partner's investment and the partner's costs incurred in disposing of the interest. The accumulated taxable revenue and the contributions by, and distributions to, the partner during the holding period are taken into account in computing disposition costs. This is accomplished by adjusting the cost of the partner's investment to reject the increase or decrease in the value of the partnership's net assets during the period of ownership. This computation is to the RISK computation for shares, but it does not have to be performed annually. Partnerships must file information concerning this computation with the tax authorities, and the authorities use this information to assess tax. The partnership and the partner have the right to appeal the calculation.
Partners in a transparent company that cease to be subject to Norwegian tax must include in income the unrealised gain or losses from their tax positions in the partnership. This inclusion does not affect the other partners in the partnership that remain subject to Norwegian tax. After the annual computation of the company's income or loss, a part of the net result is allocated to the departing partner, even though such partner is no longer taxed by Norway.
Norway taxes commercial and individual trusts on ordinary income at the rate of 28%. Charitable and humanitarian trusts are not subject to Norwegian tax.
TAXATION OF SELF-EMPLOYED PERSONS
Income from self-employment is subject to ordinary income tax and personal income tax. All ordinary income (business income) is taxed at a rate of 28%. Taxable personal income, is subject to tax at a maximum marginal rate of 13,7%.
To find taxable personal income from self-employment, first determine deemed capital income by multiplying the tax value of assets used in the business, is the capital base, by a 13,5% capital profit rate. Adjustments to the value used for assets can be made in certain situations.
Next, subtract from business income the actual net financial income (adding interest expenses and subtracting interest income) and deemed capital income determined by the above formula. Then subtract 20% of the wages and social costs of the business. This yields taxable personal income, which is not eligible for any deductions. Ordinary income is eligible for the same and allowances permitted to all individual taxpayers on ordinary income.
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.
For further information contact Unni Bjelland, Ernst & Young, Tel: +472 203 6000 or Fax: +472 203 6370.
Visit the Ernst & Young Norway website at Click Contact Link