Norway: First withholding tax exemption ruling by tax authorities

Norway: Withholding exemption ruling by tax authorities

Norway’s Directorate of Taxes issued a binding “advance ruling” in June 2015, concluding that a holding company incorporated in Luxembourg was not considered to be genuinely established in Luxembourg. Therefore, dividends from the Norwegian subsidiaries were not exempt from withholding tax under the Norwegian domestic tax law.


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KPMG observation

The binding advance ruling is the first published assessment by the Norwegian tax authorities on application of the exemption from withholding tax to private equity structures. 


The Norwegian taxpayer asserted that the holding company was established in Luxembourg in order to attract foreign third-party investors, given that Luxembourg is a well-known jurisdiction for international investors with commercially attractive conditions. In this situation, the third-party investors were foreign funds investing in the Luxembourg holding company through Luxembourg intermediary holding companies, and one individual investor (a resident abroad). 

The Norwegian taxpayer argued that it would be more costly and difficult to attract investors for direct investments in Norway, in as much as the management company of the funds investors was already familiar with the platform and obligations in Luxembourg. The management company and the managed funds had established a structure consisting of several other investment and management companies as well as a service company in Luxembourg. The service company was set up to handle certain functions such as accounting and tax for the Luxembourg holding company. This company also assisted with the preparation and filing of returns, payment of social security contributions, and value added tax (VAT) compliance for both the service company and other companies directly or indirectly owned by the funds managed by the management company. 

The Luxembourg holding company had its own board of directors, consisting of three Luxembourg residents and one UK resident. All decisions at the board level were made in Luxembourg. 

The Luxembourg holding company was also to rent office space in Luxembourg, while several of the administrative functions (such as tax obligations in Luxembourg) were contracted to the Luxembourg service company. 

The aim of the joint venture Luxembourg holding company was to acquire 50% ownership of an existing Norwegian company. The Luxembourg holding company did not intend to invest in other companies or assets.

Ruling by tax authority

In issuing the tax ruling, the Norwegian tax authorities asserted that the establishment of the Luxembourg holding company was “tax motivated,” as a number of the investors in the Luxembourg holding company would not be considered qualifying subjects under the Norwegian exemption method had the investment been made by them directly.

Furthermore, the tax authorities noted that even though a holding company usually has a limited physical level of substance, the company must exhibit certain elements to prove physical existence—including premises, staff and equipment—ascertainable by third parties.  Here, the activity of the Luxembourg holding company (a single equity investment firm) was considered limited, and gave limited grounds for the company to participate in the local business activity in Luxembourg. 

The Norwegian tax authorities concluded that the Luxembourg holding company would be regarded as a shell company for dividend distributions from the Norwegian subsidiary, noting that the objective circumstances warranting the establishment in Luxembourg were insufficient. 

Norwegian exemption method

A non-Norwegian entity may qualify for exemption from withholding tax if the entity is comparable to a Norwegian qualifying subject. Generally, the exemption is not available if the foreign investor is resident in a low-tax jurisdiction. EEA-resident entities may nevertheless qualify, provided the entity satisfies a substance test or requirement. 

Under the substance test, the Norwegian tax authorities will assess whether the entity is actually established in the host EU / EEA Member State and conducts genuine economic activities in the host state. The substance requirement was introduced after a judgment of the Court of Justice of the European Union (CJEU) in C-196/04 Cadbury Schweppes, in which the CJEU concluded that while EU Member States are generally not allowed to discriminate against cross-border transactions, the prohibition does not apply to wholly artificial arrangements set up to attract tax benefits. This test has been refined in a number of cases after Cadbury Schweppes. The intention of the test, as phrased in the Norwegian law, is to capture the jurisprudence from the CJEU and the EFTA Court of Justice. 

Administrative practice shows that the Norwegian tax authorities follow a strict line in determining what constitutes “genuine establishment” with reference to the scope of activities of the non-resident entity. Of particular importance has been the amount of physical “substance”—with focus on staffing and premises of the foreign entity.

For reference, a Norwegian holding company is a limited liability entity that has its own board of directors. The company is not obliged to have employees or physical substance such as office premises in Norway. The management of the company may be outsourced to management companies. However, a foreign qualifying subject must be able to demonstrate that its establishment entails participation in the economic activity in the country or state where it is established. 

In the joint cases E-3/13 and E-20/13 Fred Olsen and others, the EFTA Court considered whether discriminatory treatment of beneficiaries in a Liechtenstein trust was in breach of the free movement rules of the EEA agreement. The case concerned the application of the Norwegian CFC rules (not the exemption method), but the position taken by the EFTA Court is of interest for the present purposes. Rather than finding a specific Norwegian comparator, the EFTA Court simply noted that this type of taxation did not take place in purely domestic situations. Also in that case, the trust had no own employees, and outsourced its management and administration.

The Ministry of Finance has also introduced a "motive test" to the wholly artificial arrangement assessment. The Ministry noted that the finding of a wholly artificial arrangement presupposes the identification of a tax avoidance motive. This means that if there is no tax avoidance motive, the non-resident entity must fulfil the "substance test" regardless of the actual level of substance. While establishments in Luxembourg commonly would confer a tax benefit compared with a Norwegian establishment, the statements made by the Ministry of Finance seem to go some way towards recognizing that the wholly artificial arrangement-test in essence is an anti-avoidance measure.

Following the opinion of the EFTA Court in joint cases E-3/13 and E-20/13 Fred Olsen and others, it is questionable whether the Norwegian tax authorities can maintain this position. Statements made by the EFTA Court clearly indicate that genuine establishment does not necessarily require permanent employees; acquired services can serve the same purpose. The key is that the entity is participating in the economic life in its purported state of establishment.

With reference to the advance binding ruling, it is also relevant to which extent fund investors would have qualified in their own right. The tax authorities emphasised that the establishment in Luxembourg would provide shelter for several of the third-party fund investors, as they would not qualify in their own right. The tax authorities did not emphasize the fact that approximately 67% of the investors would qualify.  


For more information, contact a KPMG tax professional in Norway:

Thor Leegaard | +47 406 39183 |

Marius Aanstad | +47 406 39551 |

Per Daniel Nyberg | +47 406 39265 |

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