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September 2010 - Finance. Legal Developments by Brækhus Dege Advokatfirma ANS.

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The Norwegian real estate market is recovering from the financial crisis. The number of transactions is growing, and the construction activities are increasing. The financial crisis did not hit Norway as hard as other European countries, and the political and legal stability in the country could attract foreign investors in the years to come. In this brief article, we give an outline of some selected legal and tax issues regarding investments in Norwegian real estate with the emphasis on business property.

Structuring real estate investments in Norway

Almost all business property in Norway is held by single purpose vehicles (SPVs) in the form of limited liability companies ("AS") or public limited liability companies ("ASA"). The reason for this is the Norwegian tax exemption rules for profit from sale of shares if the seller also is an AS or ASA. Thus, purchasing a Norwegian business property most likely involves the purchase of the shares in the company owning the property. This also leads to normally establishing or purchasing an existing holding structure as part of the investment.

The previously more popular unlimited or pro-rata limited companies (ANS, DA) and limited partnerships (KS) are now more seldom used in setting up new structures involving real estate.

Fund concepts or sale- and leaseback structures are possible, but requires extensive planning and counseling.


The purchase contract process

As opposed to most other countries, in Norway, the bidding process itself could lead to a binding agreement between the purchaser and the seller. However, it is normal to include a reservation in the bid stating that a purchase contract must be signed before the sale is legally binding. Thus, legal counseling from a Norwegian lawyer is advisable at an early stage (pre-bid).

A purchase contract regarding a Norwegian business property most likely involves the purchase of an SPV AS. Thus, the due diligence process is important, also with regard to company law, tax and accounting issues. The due diligence is normally carried out before signing the purchase contract.

Due to the nature of the purchase, the contract also regulates warranty and representations issues relating to both the property and the company.

The purchase price is based on the value of the real estate adjusted with the adjusted value of other items in the SPV's balance sheet. The settlement is normally split in two: A settlement at the takeover date based on the estimated balance sheet at takeover, and an adjustment based on a revised balance sheet at takeover set up some time (e.g. 45 days) after the takeover.


Tax issues

As mentioned above, the profit from a sale of shares held by a Norwegian AS is in practice tax-free. For non-resident investors, the profit from a direct sale of shares is totally tax-free in Norway in most cases.

Net rental income from real estate located in Norway is subject to general corporate income tax at 28 percent.

Dividends distributed to non-resident investors are subject to withholding tax unless the investor is based in the EEU (if certain requirements are met). For residents outside of the EEU, the withholding tax rate is 25 per cent, or often reduced to 15 per cent depending on the relevant tax treaty between Norway and the investor's country of residence.

Transfer of title of property from one legal entity to another triggers a 2.5 per cent stamp duty. Thus, extensive planning is sometimes necessary in order to avoid stamp duty.


Brækhus Dege Advokatfirma DA

Brækhus Dege Advokatfirma ANS is one of Norway’s major law firms, employing approximately 35 lawyers. We specialise in national and international business law, focusing on EU & EEA-law; international corporate law, bankruptcy and insolvency law, including international insolvency, banking, securities and finance, labour law, tax and VAT law, IT and telecom law, real estate and construction, and litigation/dispute resolution.