Norway's tax system and tax framework for cross- border mergers and acquisitions (M&A) has been relatively stable over the last years.
Norway's tax system and tax framework for cross- border mergers and acquisitions (M&A) has been relatively stable over the last years. In 2014, a Tax Commission presented a tax reform that was partly followed up in the state budget for 2016 and later years. However, the tax framework generally retains the main characteristics of the corporate income tax system before the tax reform.
As of the financial year 2014, Norway adopted legislation that sets limitations on intragroup interest. This legislation applies to limited liability companies as well as Norwegian branches of foreign companies
and partnerships.The rules limit the intragroup interest deduction to 25 percent of tax-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).
The Ministry of Finance issued a public consultation paper in 2017 proposing to extend the earnings-stripping rules to interest on loans from unrelated parties, for companies that are part of a consolidated group.The State Budget for 2018 states that the amendments should be effective from 1 January 2019.
The most significant recent change is the proposed application of earnings-stripping rules on third party interest cost. Based on the public consultation paper, the rules offer few exemptions, which may make it difficult to claim full interest deductions in Norway on intragroup financing arrangements.
The reason for the proposal is the desire to prevent multinationals from shifting profits out of Norway to
more beneficial tax jurisdictions. Two exceptions from the application of the interest limitation rules were proposed.
The first exception would apply where the equity ratio is equal to or greater than the group ratio. This exception would apply to companies that are included in a consolidated financial statement prepared under Norwegian generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS) or the accounting rules of another member state of the European Economic Area (EEA).
The second exception was proposed for loans made in the ordinary course of business.
The rules would primarily apply when the group prepares consolidated financial statements that include the company in question. However, the rules would also apply for companies that could be included in the consolidated financial statements under IFRS. This implies that complex assessments required under IFRS would become part of Norwegian tax law, which could potentially lead to prolonged and expensive tax disputes.
As of the financial year 2019, multinational groups with operations in Norway need to consider and evaluate their current financial arrangements in light of these new rules. The arm’s length principle continues to apply in addition to the interest deduction limitation rules. KPMG in Norway assumes the arm’s length principle will be applied in exceptional cases since the new rules are strict; however, this remains unclear. The amendments to the Limited Companies Act and Public Limited Companies Act revise corporate governance rules, remove certain dividend constraints, and ease the ability to arrange intragroup loans from Norwegian subsidiaries to foreign group companies.
Norway signed the Organisation for Economic Co-operation and Development’s (OECD) Multilateral Convention to Implement TaxTreaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) on 7 June 2017. In its preliminary position on MLI, Norway included a list of 28 tax treaties that will be amended through the MLI. Norway has made partial or full reservations against several of the MLI articles.
Before entering into force, the MLI would have to be ratified by the Norwegian Parliament, but the Ministry of Finance has not yet submitted a proposal to the Norwegian parliament.
The Ministry of Finance has also proposed amendments to the domestic tax residency rules. Under the proposals, companies incorporated in Norway are deemed to be resident in Norway for tax purposes. Further, non-resident companies would be deemed to be resident in Norway if effective management and control is carried out in Norway. The proposed legislation also provides a tie-breaking rule for companies resident in a country having a tax treaty with Norway. If resident in the other treaty state, the company would be considered resident in Norway.
The proposed rules on tax residency were issued in a public consultation paper. In the State Budget for 2018, the Ministry of Finance stated that the new rules are expected to be submitted to the Norwegian parliament in 2018.
The general corporate tax rate was reduced to 23 percent (from 24 percent), as of fiscal year 2018.
An acquisition in Norway usually takes the form of a purchase of the shares of a company, rather than its business and assets, as the sale of shares may be exempt. Thus, it can
be useful to purchase entities by setting up a Norwegian purchasing entity so the investor may exit without any major tax costs and reinvest in another Norwegian entity.
Acquisition of a Norwegian company may be carried out either through a share purchase or asset purchase, or by a merger. (See ‘Choice of acquisition vehicles’.)
A number of aspects related to asset acquisitions are discussed below, followed by a discussion of share acquisitions.
Purchase of assets
A purchase of assets would generally result in an increase in the tax base cost base, both for capital gains taxation and depreciation purposes. This increase is likely to be taxable for the seller, so a seller would thus normally prefer to sell shares in order for the exemption method to apply. An asset purchase would enable the purchaser to avoid assuming
potential historical tax risks and tax attributes and may thus be preferred from the buyer’s perspective.
The purchase price must be allocated among the individual assets, and this allocation determines the tax bases for future depreciations.
Goodwill paid for a business (acquired goodwill) may be depreciated for tax purposes at 20 percent on a declining- balance basis. Time-limited intangible rights, such as leasing contracts, rights of use or patents, are depreciated on a straight-line basis over the lifetime of the asset.
Non-time-limited intangible rights, such as a company name or brands, are only depreciable where there is a clear decrease in value, in which case the right is amortized over the asset’s projected lifetime.
The seller is taxed on any gain on intangible assets and goodwill.The gain could be deferred and taxed at 20 percent on a declining balance through the company’s gain and loss account. A higher amount could be entered as income.
All assets used in the business are depreciable if they are either listed in the following depreciation groups or are documented as having lost value over time. The rates for different depreciation groups are as follows:
Plant and buildings with an estimated lifetime of 20 years or less may be depreciated at 10 percent, rather than 4 percent. However, the increased depreciation rate of 10 percent does not apply to plant and machinery used in petroleum activities outside the European Union (EU)/EEA.
Automobiles, tractors, machinery and other assets covered by category (d) may be depreciated with an additional 10 percent in the year of acquisition (for a total of 30 percent in the acquisition year). The same applies if an investment or upgrade is made to an asset in category (d).
All the tangible assets listed and acquired goodwill are subject to the declining-balance method of depreciation. Assets in groups (a) to (d) are depreciated on an aggregate (pool) basis. Each asset in groups (e) to (i) must be depreciated separately. Assets in group (j) must be depreciated on an aggregated basis per building.
The depreciation rate assets in depreciation group (c) were increased to 24 percent (from 22 percent), as of 1 January 2017.
Value added tax
Value added tax (VAT) is levied on any sale of assets, unless it can be deemed a transfer of a going concern. Sales of shares do not trigger VAT, but it is important to check whether the acquired company was part of a VAT group. Further, the continued business activity needs to be de-registered or re- registered for VAT purposes.
The disposal of operating assets or shares as part of the transfer of a business, or part of a business, to a new owner can take place without triggering VAT. One condition is that the new owner continues the activity within the same industry. If there is evidence of purchasing with the intention of closing down the business, a VAT liability is triggered.
Purchase of shares
A share sale is normally the seller’s preferred choice as a Norwegian corporate seller benefits from the exemption method and does not remain liable for the business.
There are no immediate Norwegian tax consequences for a foreign company when it acquires shares in a Norwegian company. Thus, where goodwill is included in the value of shares and depreciation for tax purposes is not permitted.
Apart from the carry forward of losses, as described later in the report, the tax position of the acquired Norwegian company remains unchanged.Thus, there is no possibility of a tax-free step-up in the tax base of the assets of the acquired company.
An acquisition of shares can be restructured in such a way that the purchaser obtains tax benefits (see later in the report).
It is not possible to obtain assurances from the tax authorities that a potential target company has no tax liabilities or advice as to whether the target is involved in a tax dispute. It is thus recommended that the purchaser carries out due diligence prior to an acquisition. A normal part of the due diligence process involves a review of the tax affairs of the potential target company.
Financing costs generally are considered as ordinary operating costs and should be deductible when incurred. However, costs for legal assistance, other consultancy costs and costs for due diligence, among others, related to the purchase of shares are treated as part of the shares’ cost price and should be capitalized on the shares. Due to the exemption method, the cost is not deductible for a Norwegian corporate shareholder.
Tax indemnities and warranties Indemnities and warranties are commonly used in Norwegian transactions, and the parties may freely agree upon terms and conditions.
Losses of any kind may be set off against income from all sources and capital gains, and they may be carried forward indefinitely. Changes in ownership do not change the right to carry forward, provided that it is not likely that the exploitation of the losses was the main motive for the transaction.
Dividend payments are taxable to the receiver, regardless of whether the dividends are paid before or after the transaction or whether the payment is made to the old or new shareholder.
Norway does not have transfer taxes, except for registration of new legal owners of cars and real estate. Stamp duty on real estate is 2.5 percent of the fair market value. Stamp duty for real estate is not payable when shares are transferred in a corporation holding real estate or the real estate is a part of a demerger.
It is possible to get pre-clearance from the tax authorities on transactions, usually in 1–3 months, provided the facts are clearly presented.
The following vehicles may be used to acquire the shares and assets of the target:
Generally, the advantages and disadvantages of the different acquisition vehicles must be considered case-by-case.
Local holding company
There is no consolidation of groups for tax purposes, but relief for losses may be claimed within a group by way of group contributions. Group contributions are deductible for the contributor and taxable income in the hands of the recipient. The holding requirement for group contribution purposes is 90 percent. The parent company must hold, directly or indirectly, more than 90 percent of the shares and the voting rights of the subsidiary. The ownership requirement must be met at the end of the fiscal year.
Note that group contribution (with tax effect) may not be given or received with respect to income subject to the Norwegian petroleum taxation regime.
The tax deduction for a group contribution is conditional on the contribution not exceeding the taxable income of the contributor, and the requirements for contributions under the Companies Act must be met. Under the Norwegian Companies Act, any contribution from a company to a shareholder, except for the repayment of the share capital, must conform to the rules concerning dividends. Both the contributor and the recipient must affirm that the required conditions are fulfilled at the end of the income year in an enclosure to the tax return for the year of contribution.
Group relief is available between Norwegian subsidiaries of a foreign parent as long as the 90 percent ownership requirement is fulfilled by 31 December. This applies to foreign companies resident within the EEA that are considered comparable to Norwegian companies, as long as they are taxable to Norway through a permanent establishment and the group relief is taxable to Norway. Also, under non-discrimination clauses of tax treaties, group relief is available for contributions made from a branch of a foreign resident company to a Norwegian subsidiary of the same tax group.
Foreign resident company
A non-resident company acquiring assets in Norway would generally be deemed to have a permanent establishment. The taxation of a permanent establishment is normally the same as the taxation of a company. However, the company is free to remit the profit without awaiting completion of the formalities, such as approving the annual accounts or deciding a dividend distribution, and there is no requirement that distributions are within distributable equity.
Non-resident intermediate holding company
Norway has comprehensive tax treaties with more than 90 countries, including all industrialized countries and most important developing countries.
A non-resident company normally carries on business in Norway through a Norwegian corporation (subsidiary) or through a registered branch. The corporate tax rate of 23 percent applies to both subsidiaries and branches.
Although the choice of the legal form of an enterprise should be determined case-by-case, the following tax issues should be considered:
No special tax legislation applies to joint ventures.
Interest on loans is normally deductible for the purposes of calculating the net profits from business activities where the loan is taken out for the purpose of acquiring shares.The deduction is made on an accrual basis.
Intragroup interest deduction limitation
Interest limitation rules may however reduce the deductibility of interest costs to related parties. The basis for the calculation is the taxable income as stated in the tax returns, including adjustment for group contribution.
Tax-exempt income, such as certain dividends and gains on shares, does not increase the basis for deductions.Tax depreciation and net interest expenses (on both related-party debt and debt to unrelated creditors) are added back to the taxable income, and maximum deductible interest on related- party debt is capped at 25 percent of this amount. Payments to third parties also count toward the maximum deductible interest.
The rules apply to interest expenses from related parties (directly or indirectly hold 50 percent or more of the shares) and to loans guaranteed by related parties. Note however that loans guaranteed by subsidiaries as well as loans granted with security in the underlying subsidiaries’ shares are outside the scope of the interest limitation rules.
Companies with tax losses carried forward are required to pay tax on non-deductible interest insofar as it exceeds current- year losses, as it may not be set off against increased income under the interest limitation rules.
The rules do not apply to companies with 5 million Norwegian krone (NOK) or less in net interest costs (including interest on related-party and third-party debt). Disallowed related-party interest costs can be carried forward for up to 10 years.
The financial sector and the petroleum industry are currently exempt from the rules.
The arm’s length principle continues to apply in addition to the interest deduction limitation rules. KPMG in Norway assumes the principle would be applied in exceptional cases since the new rules are strict; however, this remains unclear. Where a Norwegian company is thinly capitalized, the tax authorities may deny the deduction of part of the interest, or part of the interest might be considered a dividend distribution to the foreign parent company.
There is no WHT on interest or royalties. The Tax Commission’s 2014 report on tax reform recommended that Norway implement WHT on interest and royalty payments. In the report, a ‘royalty’ would include lease payments on certain tangible assets, such as bare-boat rentals of vessels and rigs. WHT on royalty and interest has not yet been introduced, but a cross-party agreement from 2016 states WHTs need to be reviewed in more detail, including WHTs on lease payments.
It is expected that the Ministry of Finance will prepare a discussion paper for public consultation.
These recommendations were not proposed in the 2018 state budget, but a cross-party agreement maintains that WHTs need to be reviewed in more detail, including WHTs on lease payments. The Ministry of Finance is expected to prepare a discussion paper for public consultation.
Checklist for debt funding
When funding a Norwegian entity, the following questions should be asked:
There is no capital duty of any kind on contribution to equity.
The tax treatment of a financial instrument usually is determined by the instrument’s form rather than its substance. No single characteristic is decisive, but the following characteristics are considered to be typical of debt:
The following characteristics are considered to be typical of equity:
Any settlement that permanently reduces the company’s obligation to make payments or reduces its claims against third parties is accepted as income/loss at the time of settlement, as long as the settlement is made with third parties. Any settlement within a group must be documented as a fair market action, or the tax authorities will likely challenge it.
Concerns of the seller
The seller normally prefers a sale of shares, because this frees them from responsibilities and historical risk and attracts more favorable tax treatment. However, the tax benefit is normally a part of the purchase price discussions, which makes the choice less crucial for both parties.
Company law and accounting
In Norway, labor laws are protective and favor employees, who are entitled to have all their earned rights transferred with them.
Norwegian legislation also makes all contracts, etc., valid after a sale of shares, unless there are specific changes of control clauses or a change of ownership is clearly a breach of important explicit and implicit conditions.
For the dissolving entity, a formal merger is not considered liquidation. The company is regarded as a fully continuing corporation in all legal aspects unless the contracts state otherwise.
For accounting purposes, a purchase of assets is considered as a transaction, and the purchase price must be allocated. Only transactions within a group, without change of control, are treated as continuous transactions, provided the consideration is shares in the purchasing company.
There is no consolidation of groups for tax purposes, but relief for losses may be claimed within a group by way of group contributions. Group contributions are deductible for the contributor and taxable income for the recipient. The holding requirement for group contribution purposes is 90 percent.
The parent company must hold, directly or indirectly, more than 90 percent of the shares and the voting rights of the subsidiary. The ownership requirement must be met at the end of the fiscal year.
Group contribution (with tax effect) may not be given or received with respect to income subject to the petroleum tax regime.
Group contribution is available between Norwegian subsidiaries of a foreign parent as long as the 90 percent ownership requirement is fulfilled at year-end. The same applies to foreign companies resident within EEA, which are considered comparable to Norwegian companies regarding group relief as long as they are taxable in Norway through a permanent establishment and the group relief is taxable in Norway. Also, under non-discrimination clauses of tax treaties, group relief is available for contributions made from branch of a foreign resident company to a Norwegian subsidiary of the same tax group.
Mergers/demergers and exchanges of shares
If a foreign company wishes to gain control over a business run by a Norwegian limited company, the foreign company can either purchase all the shares in the Norwegian company or purchase the business activity. Takeovers may also be carried out as mergers.
Mergers and demergers
The formal rules for mergers and demergers of companies are set out in the Limited Companies Acts. A proposal for a merger agreement is drawn up by the boards of the two companies and presented to the general assembly of both companies. The resolution of the general assembly of both companies must be reported to the National Registry of Business Enterprises within 1 month. If not, the merger is not effective. When the merger resolution has been registered, the registrar will publish the resolution and notify the companies' creditors that they must report their claims to the companies within 2 months from the date of the last announcement if they intend to object to the execution of the resolution. Corresponding rules apply to demergers.
Tax treatment of mergers and demergers
Mergers and demergers may be treated neutrally for tax purposes. The companies may also carry tax losses forward after the merger, subject to anti-avoidance provisions. A prerequisite for tax neutrality is that there is continuity in the involved tax positions before and after the transaction.
Further, the Ministry of Finance may, on application, grant a tax reduction or relief from tax on group reorganizations that would otherwise not qualify for neutral treatment. However, the application procedure may be lengthy and the application must be made in advance of the planned transaction.
Conversion of a Norwegian registered company into a branch of a foreign company
The conversion of a Norwegian registered company into a branch of a foreign company resident within the EEA-area may be carried out by way of a merger of the Norwegian company into the foreign company. This type of merger or demerger may be carried out on a tax-neutral basis.
Further, such a conversion may be carried out by way of liquidation of a Norwegian company held by a non-resident company. For tax purposes, the liquidation will entail a full realization of the assets and liabilities of the Norwegian company. As a general rule, gains on the realization of assets are taxable at a rate of 24 percent. Losses are deductible.
Under certain conditions the shareholders may apply for tax deferral, which is often granted.
Cross-border mergers/demergers and exchanges of shares Rules introduced in 2011 allow for tax-neutral cross-border mergers and demergers between Norwegian private limited companies/public limited companies and foreign limited companies that are resident within the EEA area. A merger or demerger between a Norwegian transferring company and a foreign qualifying company does not trigger taxation at the company or shareholder level.
In 2015, the Norwegian government amended the rules on cross-border intragroup transfers of assets and liabilities. The new rules apply to:
However, if assets, rights or liabilities are taken out of Norwegian tax jurisdiction, the general exit tax rules will apply. The legislation also allows for the tax-neutral exchange of shares, when transferring at least 90 percent of the shares in a Norwegian transfer or private limited company/public limited company in consideration for shares in a foreign resident company. The same applies when the transferee company is resident in Norway and the transfer or company (limited liability) is resident in another country. These rules apply both within and outside the EEA area.
A general condition for tax-free cross-border mergers, demergers and exchanges of shares is that the participating companies are not resident in low-tax countries within the EEA area, unless the company is genuinely established and carries on business activities in the EEA country. Exchanges of shares can also be carried out outside of the EEA, provided that the companies are not resident in low-tax countries.
A general condition under the rules is that the transaction is tax-neutral in all countries and that all tax positions are unchanged for the shareholders and the companies involved. There are some exceptions.
The Ministry of Finance has the authority to adopt regulations on tax-free transfers of businesses, etc., in the following cases:
In Norway, transfer pricing policies must be documented at the request of the tax authorities. Failing to comply with such a request leads to fines. In addition, the company must keep a documentation file that can be forwarded to the tax authorities on short notice. Transfer pricing documentation rules impose an obligation for companies to prepare specific transfer pricing documentation. Norway’s transfer pricing system is based on the OECD’s guidelines.
Dual residency is treated in accordance with a relevant tax treaty between Norway and another country.
However, domestic law clearly states that a person is a Norwegian tax resident if they spend more than 183 days in Norway in any given 1-year period.
Corporate shareholders are exempt from taxation of dividends and gains on shares, except for a clawback of 3 percent on dividends. The clawback does not apply if the dividend is distributed within a tax group. Losses on shares qualifying under the exemption method cannot be deducted.
For individual shareholders, dividends and gains are taxed under a modified classical system.
Exemption for dividends and gains on shares in companies resident in the EEA
For corporate shareholders, an exemption system generally applies to all investments within the EEA. For companies resident in low-tax jurisdictions within the EEA, the exemption method only applies if the investee company fulfils an additional substance requirement. In the language of the legislation, the exemption only applies if such a company is genuinely established and performs real economic activity in the relevant jurisdiction. Fulfilling this criterion is based on the particular facts and circumstances. A key factor is to consider whether the foreign entity is established in a similar way to what is normal for such entities in both the country of residence and Norway.
If the investment qualifies, the exemption method covers dividends and gains on shares and derivatives where the underlying object is shares, regardless of the level of holding or holding period. Trading in shares and certain derivatives is thus tax-exempt when made from a Norwegian resident limited company.
Convertible bonds are not covered by the exemption method.
Losses on shares in a company which is a tax resident in a low-tax country within the EEA and lack the sufficient
substance are not deductible, as the shares, in the case of a loss, qualify under the exemption method, even though a gain or dividends would not.
Limitation of exemption for investments outside the EEA
For investments outside the EEA area, the exemption only applies if the shareholder holds 10 percent or more of the hare capital and the voting rights of the foreign company. The hares must be held for a period of 2 years or more. Losses are not deductible if the shareholder, at any point during the last 2 years, has held 10 percent or more of the share capital or the voting rights of the foreign company. The exemption does not apply to investments outside the EEA, where the level of taxation is below 2/3 of the Norwegian tax that would have been due if the foreign company had been resident in Norway (both a white list and a black list exist). Dividends are tax-exempt from day 1, provided that the criteria are met at a later time.
For investments outside the EEA not qualifying for the exemption, dividends and gains are taxable and losses are deductible. For such investments, a credit for WHT and underlying tax is granted.
Exemption from withholding tax on dividends for EEA resident corporate shareholders
The exemption method also provides for a tax exemption for shareholders resident within the EEA, meaning that no Norwegian WHT is due for shareholders that are covered by the exemption method. The exemption method only applies if the shareholder fulfils a substance requirement (see above). In the language of the legislation, the exemption applies only if the company is genuinely established in and performs real economic activity in the relevant EEA country. Fulfilling this criterion is based on the particular facts and circumstances.
A key factor is to consider whether the foreign entity is established in a similar way to the normal organization of such entities in both the country of residence and Norway.
Shareholders resident outside the EEA would still be charged WHT, subject to limitations under tax treaties.
Advantages of asset purchases
Disadvantages of asset purchases
Advantages of share purchases
Disadvantages of share purchases
KPMG Law Advokatfirma AS Sørkedalsveien 6, Oslo
T: +47 4063 9231
Ørjan Ravna Rørmoen
KPMG Law Advokatfirma AS Sørkedalsveien 6, Oslo
T: +47 4063 9421