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Tax and Accounting

August 2008 - Tax & Private Client. Legal Developments by Wiersholm.

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Companies doing business in Norway may be subject to a number of direct and indirect taxes. A major tax reform in 2005 has made tax planning and restructuring even more important than before.

9.1 General

Norwegian companies are subject to corporate income tax, social security contributions (employer’s contributions) and value added tax (VAT). Partnerships and limited partnerships are legal but not taxable entities. Partners are taxed individually and directly on their share of the income. Individuals are liable for tax if they reside in Norway. The tax rates for individuals range from 7.8% to 47.8%. The corporate income tax rate is 28%. Norwegian companies and individuals residing in Norway are taxed on the basis of their worldwide income. A tax reform was passed in 2004/2005. The key issue in the reform was the introduction of a distinction between shares owned by corporate entities and shares owned by private individuals. Following the reform, dividends paid to corporate entities and gains on shares earned by such entities are tax exempt. As a consequence, such entities cannot deduct capital losses from the sale of shares. All dividends paid to individual shareholders exceeding a minimum tax exempt allowance are subject to double taxation. As a consequence of the reform, recognition of income and expenses depends to a greater extent than previously on the business organisation, so that tax planning and restructuring has become even more important than before. 

9.2 Taxation of resident companies and the “participation exemption rule”

9.2.1 General

All companies incorporated under Norwegian law are subject to the corporate tax system. Foreign entities resident in Norway are liable to pay income tax here if certain criteria are met. Generally, if liability for the company’s debt is limited to its capital, the foreign entity will be taxable in Norway. The level of income tax for companies is a flat rate of 28%. 

9.2.2 The participation exemption rule

As mentioned above, following the tax reform in 2005 a distinction is made between shares held by corporate entities and shares held by private individuals. Dividends paid to corporate entities and capital gains from the sale of shares by such entities are tax exempt. Consequently, such entities cannot deduct capital losses from the sale of shares. This is referred to as the participation exemption rule. The participation exemption rule applies to the following Norwegian entities and to the foreign equivalents of such entities (for companies resident abroad, see Chapter 9.8): private and public limited companies, savings banks and other owner-occupied financial companies, mutual insurance companies, co-operatives(including housing co-operatives), unit trusts, inter-municipal companies, companies and other entities wholly owned by the State, associations, foundations, municipalities, county municipalities and some bankrupt estates. To a certain degree, partnerships are also subject to the participation exemption rule (see Chapter 9.6). The participation exemption rule also applies to entities that are subject to special tax regimes for the shipping industry, electrical power industry and offshore petroleum industry. However, application of the rule in these cases is subject to special rules. The following income and losses are tax exempt: ·  gains or losses upon realization of owner shares in private and public limited companies, partnerships, savings banks and other owner occupied financial companies, mutual insurance companies, co-operatives, unit trusts, intermunicipal companies and the foreign equivalents of these entities · legally distributed dividends · gains or losses upon realization of derivatives if the derivative’s underlying object is an owner share as mentioned in the first bullet point. Distribution by a company of part of its property as dividends to its shareholders is in principle deemed to be a taxable advantage for the company. However, the participation exemption rule also applies when a company distributes shares as dividend to its shareholders. Consequently, this advantage is exempt from the company’s taxation. The participation exemption rule does not apply to income from companies resident in low tax countries outside the EEA or from portfolio investments in companies resident outside the EEA. Nor does it apply to gains or losses on realization of owner shares in a partnership, if the partnership’s value of shares in companies resident in low tax countries outside the EEA and of portfolio investments in companies resident outside the EEA, exceeds 10 per cent of the partnership’s total value of shares at the time of realization. 
 

9.3 Valuation of assets

9.3.1 Norwegian accounting law

Norwegian Accounting law provides that current assets shall be valued at the lowest of cost or real value (net realisable value). Financial statements are based on the historical-cost concept. Receivables are classified as current assets to the extent that they are due within the fiscal year. Securities are normally valued at the lower of cost or market value. Inventory is valued at the lower of cost or market value using FIFO or weight-averaged cost. FIFO must be used for tax purposes. Fixed assets must generally be valued at cost. Goodwill can only be capitalised when it is acquired by purchase or inclusion of an external activity via acquisition. Research and development, market surveys and test operations, etc. can only be capitalised if such costs will substantially increase the future value of the company. Deferred taxes are recorded using the full liability method. 

9.3.2 International Financial Reporting Standards (IFRS)

The valuation rules mentioned above do not apply to accounting entities applying International Financial Reporting Standards. IFRS primarily values assets at fair value, as opposed to historical cost reporting as described above. In practice, the different starting points in the two financial reporting regimes should not be exaggerated, as IFRS often allows historical cost valuation as an option in each individual accounting standard. 

9.4 Deductions

In general, all expenses related to the earning, maintenance and securing of taxable income are deductible as business expenses. However, gifts and representation expenses are not deductible. Even though income on shares is no longer taxable pursuant to the participation exemption rule, expenses relating to such income are deductible, except for purchasing and selling costs. As a general rule, interest on debts is deductible irrespective of whether the loan is connected to the earning, maintenance or securing of a taxable income. The cost of fixed assets must be capitalised for tax purposes if the value exceeds NOK 15 000 and its expected economic lifetime is more than three years. Fixed assets that have a lesser value or that have a shorter expected economic lifetime than three years, fall outside the rules for compulsory capitalisation. Intercompany charges are fully deductible as long as they are sufficiently documented. The tax system also makes provision for depreciation for fixed capitalised assets. Property, plant equipment and certain intangible assets are depreciable for tax purposes. Goodwill included in the sale price when buying a business is also depreciable for the buyer. The declining balance method is used for depreciations.Fixed assets are allocated to different groups. The depreciation rate varies between 2% and 30%. Subject to certain requirements, tax losses can be carried forward indefinitely. 

9.5 Affiliated companies

A company is deemed to be an affiliated company if the parent company owns more than 50 % of its shares. These companies form an affiliated group, referred to in Norwegian as a ”konsern”. The group as such is not a taxable entity and each affiliated company is taxed individually. Consolidated balance sheets are not relevant for tax purposes in Norway. However, income may be transferred between affiliated companies through group contributions.  As a general rule, group contributions, both paid and accrued, are deductible by the payer company subject to the following requirements:

  • The recipient and the payer companies must be Norwegian entities. Group contributions between two or more subsidiaries in Norway are also deductible notwithstanding that the parent company is a foreign entity. In this context, a Norwegian branch of a foreign entity resident in the EEA is treated as a Norwegian entity.
  • Both the recipient and the payer companies must be members of a group where the parent company owns at least 90% of the shares in the affiliated companies and has a corresponding number of votes at the shareholders’ general meeting.
  • Both the receiving and the distributing company must report the group contribution on a specific form attached to the tax returns.
  • A company that has income that falls within the scope of the Petroleum Revenue Tax Act cannot reduce its income by making a group contribution.

Group contributions may be used by the recipient company to offset tax losses. Transfer prices between affiliated companies must be fixed on an arm’s length basis. New reporting and documentation requirements for companies that are involved in transactions with affiliated companies were passed by Parliament in June 2007. In relation to these rules an affiliated entity of the taxpayer is defined as an entity falling within one of the following categories: An entity that the taxpayer directly or indirectly owns or controls with at least 50 %  a. A person or entity that directly or indirectly owns or controls the taxpayer with at least 50% (hereafter referred to as b-affiliates) b. An entity that a b-affiliate directly or indirectly owns or controls with at least 50%, and c. A b-affiliate’s parents, siblings, children, grand children, spouse, cohabitant, spouse’s parents and cohabitant’s parents, in addition to companies that these directly or indirectly, own or control with more than 50% According to the new rules all companies will have to submit a particular form with information regarding transactions with affiliated companies. The form will be submitted to the tax authorities in an attachment to the tax return. These general reporting requirements are expected to apply at the submission of the tax returns for the income year 2007. In addition the tax authorities may request additional documentation. The tax payer will then have 45 days to provide adequate documentation for the tax authorities to consider whether prices and conditions of the transactions between the affiliates satisfy the arm’s length requirement. Such documentation has to be kept by the companies for at least 10 years after the income year. This obligation is expected to have effect as of the income year 2008. However, an entity is exempted from this extended documentation requirement, if it together with the affiliate entity has less than 250 employees, and either · has a sales income that does not exceed NOK 400 million, or · has a balance sheet amount that does not exceed NOK 350 million However, the taxpayer will not be exempted from the extended documentation requirement if the affiliate is resident in a state where Norway is not entitled to the affiliate’s income and wealth information according to an international treaty. Nor will the exemption apply if the taxpayer is taxable according to the petroleum tax law. The new reporting and documentation rules for transfer pricing transactions apply correspondingly to transactions between entities resident in Norway and their foreign branches and between foreign entities and their Norwegian branches. 

9.6 Partnerships

 

Partners are liable for individual or corporate income tax on partnership shares, depending on whether they are individual or corporate legal entities. Foreign participants in Norwegian partnerships are subject to the same rules as Norwegian participants. Partners are taxed annually on the profits earned by the partnership. The assessment basis for the taxation of partnership profits is the total revenue or loss attributable to each partner according to the partnership agreement. If no agreement exists, the partners will be liable in equal shares. To some extent, partnerships are subject to the participation exemption rule. Dividends received by a partnership and gains or losses on shares will not form part of the assessment basis at the annual taxation of the partners. If the partnership forwards the income to its partners, taxation on the distribution will be triggered only if the partner is an individual (see below). Following the tax reform in 2005, an additional tax is assessed upon any profits distributed to partners that are individuals. Distributions beyond a certain “protective allowance” form part of the partner’s ordinary taxable income and are thus taxed at a rate of 28%. The effective rate of tax on distributions to partners, when both the annual taxation of the partnership’s profits and the taxation on distributions are taken into account, is 48.16%. There is a limit on the partnership losses that partners in limited partnerships can deduct from other income. The limit is fixed at each partner’s share of the partnership’s taxable net values plus any uncalled portion of the partner’s capital contribution. The limit is also adjusted for any overcharge or undercharge on the purchase price of the partner’s share. Gains from the sale of a partnership share are taxed as ordinary income in the year of sale. Losses are deductible accordingly. The taxable gain or deductible loss equals the net remuneration for the share, less realization cost and the input value of the share. Unused protective allowance can be deducted in the taxable gain. The input value equals the sum of the share’s net cost, buying costs and the shareowner’s net capital contributions to the partnership in the owner period, adjusted for changes in the basis of the protective allowance. 

 

9.7 Capital gains and dividends

Capital gains are generally deemed to be ordinary taxable income and, correspondingly, losses from such sales are deductible. However, for corporate shareholders, the participation exemption rule contains important exemptions (see Chapter 9.2.2). From 1 January 2006, capital gains from the sale of shares and dividends exceeding a minimum risk-free profit on capital (the “protective allowance”) forms part of the individual shareholder’s ordinary taxable income. As the profits in the distributing company will already have been taxed at the rate of 28%, the effective rate of tax on dividends exceeding the protective allowance is 48.16%. The system of taxation of individual shareholders creates an incentive to finance investment in shares by taking up a loan. To counteract this, interest on loans from individuals to companies is subject to double taxation, in that interest exceeding a protective allowance is counted twice in the ordinary taxable income. Non-resident shareholders who do not conduct business in Norway are not liable to tax on gains resulting from the sale of shares in Norwegian companies. However, special rules apply if the seller has previously been a Norwegian resident. 

 

9.8 Taxation of non-resident companies

 

While companies resident in Norway are generally taxed on the basis of their worldwide income, companies resident abroad are only taxed on their economic activities in Norway (economic source income). Thus, all business activities in Norway are taxable except when exempted by a tax treaty. In accordance with the OECD Model Tax Convention, Norwegian tax treaties contain a “permanent establishment” requirement for Norwegian tax liability. Sales subsidiaries, for instance, are treated as Norwegian companies for tax purposes. The same is usually the case for foreign companies that in any other way employ staff in Norway. Representatives that buy and sell in their own name and are totally independent from the non-resident entity that they represent will generally not be considered a permanent establishment for the foreign principal. Independent representatives are generally not considered a permanent establishment unless they have the power to bind the principal. If they are deemed to be dependent representatives, they may be liable for tax on the Norwegian source income. Norwegian branches of foreign companies are liable for tax in the same way as ordinary Norwegian companies and are subject to the same tax rates. As far as withholding tax on dividends paid to foreign companies is concerned, the participation exemption rule applies to companies resident in the EEA. Thus, a company that receives dividends from a Norwegian resident company, or receives gains from the sale of shares in such company, is not liable to tax on such income/gain if it is resident within the EEA and otherwise meets the requirements of an entitled company (see Chapter 9.2.2). Correspondingly, these companies cannot deduct losses from the sale of shares in a Norwegian company.

9.9 Cross-border transactions

 

Dividends paid by a Norwegian company to a non-resident shareholder are generally subject to a 25% withholding tax (WHT) unless otherwise determined by a tax treaty. Norway has an extensive network of tax treaties with withholding taxes on dividends ranging from 0 to 25%. If the shareholder is a company resident within the EEA, the participation exemption rule ensures that the shareholder does not have to pay withholding tax. However, the exemption does not apply to individual shareholders. A group contribution from a Norwegian company to a non-resident affiliated company is not deductible for tax purposes. (For group contributions to or from branches, see Chapter 9.5) Transfer prices between affiliated companies must be fixed on an arm’s length basis. Profit transfers that differ from normal transfers between independent undertakings are unlawful. If a transaction does not appear to have been effected on an arm’s length basis, the tax authorities will make an estimate of what would normally have been included in the transaction on a ”regular” basis, and will base the tax assessment on this estimate. New legislation has been passed, providing for new reporting and documentation obligations for companies that are involved in transactions with affiliated companies (see Chapter 9.5). Transactions between affiliated entities are subject to a reversed burden of proof if one of the entities is resident outside the EEA area. The reversed burden of proof will also apply to entities resident in EEA countries if there is no treaty between Norway and this country providing for the exchange of information regarding a taxpayer’s income and wealth. 

 

9.10 Avoiding double taxation

 

Norway has a large network of tax treaties for the avoidance of double taxation. Most tax treaties entered into since 1991 are based on the credit method. In the absence of treaty provisions, the Taxation Act provides for double taxation relief in accordance with the credit method. The credit method provides for double taxation relief based on the following principles:  · Foreign taxes are deductible as long • g as the income is deemed to have its origin in the state where the foreign tax is paid. ·  Credit deductions are limited to the foreign income’s proportional part of the calculated Norwegian tax on the tax subject’s accumulated worldwide income. Furthermore, the deduction is limited to the foreign taxes actually paid. ·  The rules apply to both credit under the tax legislation and to credits governed by tax treaties. Under the tax treaties, the credit deductions are limited to the tax that the foreign state can lawfully impose on the taxpayer under the foreign legislation.  ·  According to the provisions of the Taxation Act, taxes paid in foreign countries must be documented in writing in order to be approved for counter-accounting by the tax authorities. Credit deduction may not exceed a proportional part of the Norwegian tax attributable to each of the following categories of foreign income:  a. income from business in low tax jurisdictions and income taxed according to the Norwegian CFC rules, b. income from the exploitation of petroleum abroad, c. other foreign income.  The deduction is limited to tax paid in the source country within each income category.  Foreign tax not credited in Norwegian tax one year may be carried forward for five years within each of the three income categories. However, the carry forward credit may not exceed the maximum credit in the year in which the right to credit arises. Total credit deduction to be carried forward for each year may not exceed the maximum credit deduction for that year. Effective from 2008, tax credit can also be carried back to the previous income year. 

 

9.11 Value Added Tax

 

The current general VAT rate is 25%. Special VAT rates apply to the supply of passenger transport services, letting of rooms, travel agencies and cinema tickets and are currently 8% respectively. For foodstuffs the special VAT rate is 14%. Persons engaged in trade or business and whose annual turnover from the supply of taxable goods and services exceeds a given threshold (normally NOK 50 000) are obliged to register for VAT. Foreign businesses that are established or resident in Norway are liable for VAT in the same way as Norwegian businesses and must be registered for VAT if the conditions for registration are met. Foreign businesses that only supply goods or services from abroad to recipients in Norway are normally not liable for VAT in Norway. However, the Norwegian importer may be liable for VAT. Indeed, as a general rule, an importer of goods is liable for VAT. An importer of services is liable for VAT (reversed charge) only if the service would be liable to VAT if supplied in Norway and if the service can be supplied from a remote location (intangible services). For services that cannot be supplied from a remote location, the foreign business must be registered for VAT. The supply of goods, with a contractual place of delivery in Norway, will oblige the foreign business to register for VAT in Norway. If the foreign business supplying goods and services is neither established nor resident in Norway, the business shall be registered for VAT through a representative. VAT paid on purchased goods and services (“input VAT”) is deducted from VAT received on sold goods or services (“output VAT”). If the first exceeds the latter, a refund will be paid to the company for the VAT period in question. VAT periods are bi-monthly and a strict reporting scheme applies to all businesses registered in Norway. The supply of certain goods and services, including the supply and letting of real property, the supply of health services and the supply of financial services are exempt from VAT. The suppliers of such goods and services are not liable for VAT and cannot deduct input VAT from the exempt part of the business. In addition, a VAT rate of 0% applies in some cases. This means that even though input VAT is deducted, no output VAT is charged. The zero-rate applies, amongst other things, to exports of goods and services, newspapers, books and periodicals. Foreign businesses can apply for a refund on VAT paid on the purchase of goods and services in Norway, and on the import of goods to Norway. 

 

9.12 Tax procedures

 

Companies are required to file their tax returns by 31 May in the year following the income year, with the opportunity to extend the same to 30 June upon application. In principle, all foreign entities operating in Norway directly must file tax returns. Hence, the duty to file tax returns also applies to branches and other forms of direct representation in Norway. Tax returns must be prepared by the company’s accountant and approved by the company’s auditor. Tax assessments may be appealed. Any differences between the tax return and the assessment are subject to appeal. Grounds for appeal may be wrongful interpretation of the tax laws, misunderstandings of the facts filed with the authorities and/or errors in procedure by the tax administration, provided the error could have influenced the outcome of the assessment. Companies are taxed in arrears and pay their taxes in three instalments in the year following the income year. One third of the total income tax paid in the year prior to the income year is paid on 15 February in the year following the year of income. Another third is paid on 15 April. The excess tax is paid following assessment. The excess tax is subject to an interest rate of 1.7% on amounts exceeding one third of the total tax payable. Individuals must normally file their tax returns by 30 April in the year following the income year. Returns do not need to be confirmed by an auditor. The return must be filed on a standard form. Tax audits are carried out on a random basis by tax inspectors. The inspectors are authorised to review all the books of the operation of the business in Norway. Audits may cover one or more of the previous ten business years. There are administrative penalties for submitting misleading tax information to the tax authorities. The basic penalty is a surcharge of 30%. In cases of gross negligence or wilful fraud, the surcharge may be increased up to 60%. Furthermore, criminal sanctions provide for fines and imprisonment up to two years for individuals who provide fraudulent information to the tax authorities. 

 

9.13 Accounting and audit requirements

 

Accounting requirements for limited companies and other entities are laid down in detail in the Accounting Act 1998. General partnerships with an annual turnover exceeding NOK 5 million and limited companies are obliged to submit annual accounts. Parent companies must, in addition, prepare consolidated accounts. Generally, the financial accounts must satisfy the requirements set out in the Accounting Act and good accounting practice (Norwegian Generally Accepted Accounting Principles). Norwegian financial accounting law is to a great extent harmonized with the EU accounting directives. The Norwegian Accounting Association issues financial accounting standards and defines what is regarded as good accounting practice. Norwegian financial accounting standards are strongly influenced by international financial accounting standards, particularly accounting standards issued by the International Accounting Standards Board (IASB). As of the fiscal year 2005, application of the International Financial Reporting Standards (IFRS) is mandatory for the consolidated accounts of listed companies. This requirement also applies to companies that have issued bonds or other securities that are listed on the stock exchange. These companies also have an option to apply IFRS for the company accounts. Companies that are not listed on the stock exchange may apply IFRS for the preparation of consolidated and company accounts. The Accounting Act also allows the application of a simplified IFRS regime for small and medium sized enterprises. The material content of this regime has not yet been established. The intention is that the IASB project for accounting standards for small and medium sized enterprises will provide material solutions for this option in the future. Irrespective of whether or not financial reporting follows NGAAP or IFRS, it must be reported in Norwegian and apply Norwegian currency. Accountable entities must have an appointed auditor who is fully independent of the company. The auditor must sign the tax return. All statutory audits must be conducted by accountants holding qualifications approved by the Norwegian authorities. The accountant may either be a state-certified or registered auditor. The financial year coincides with the calendar year. The annual accounts and the directors’ report must be prepared before 30 June in the year following the financial year. The annual accounts must include a balance sheet, a profit and loss account, a cash flow statement and explanatory notes and footnotes detailing special disclosures. A copy of the annual accounts must be submitted to the Register of Company Accounts together with the directors’ report and the auditor’s report within one month after the adoption of the annual accounts. If accounts are not received by the Register within six months of the date on which they are due, forced liquidation will be initiated by the Register. 

 

 

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All EU legislation concerning auditors, including the International Financial Reporting Standards (IFRS), has been implemented into Norwegian law in accordance with the EEA Agreement.