Investors and tax havens (“tax paradises”) have gained media focus in Norway lately. Here is a shallow dive into the tax in Norway levied on local and foreign Investors. Tax is fun!
1. Tax in Norway on Investments – an introduction
The investment objects (“Investments”) may be shares in mutual funds (“Funds”) or Private equity (“PE”). A PE may be built as a partnership or a limited company in Norway or abroad.
Many Funds and PEs are established in Norway and investing in Norwegian businesses. But the financial markets in Norway has a history of unstable rules. Further, the running costs in Norway are quite high. In order to collect foreign targets and capital, the Investments may be set up in a low-tax country. Many such locations have a long history of hunting foreign capital. Hence, they provide more stable rules long term. And by providing low-cost workers, materials and inventory, they can offer low running costs.
Fun fact I: The stripped rules and costs in low-tax countries may facilitate misuse and low ethic standards. Thus, Investments in tax havens (should) require a fit and maintained corporate social responsibility (CSR) strategy. At least for some industries, much effort should be invested in controlling and inspecting the workforce, inventory and suppliers. Not only when finding deals but also during the operations. Both a lack of, as well as the presence of, an efficient CSR department may make low-tax locations a bit more costly than expected.
The Investors might be companies or institutions, as well as physical persons (as opposed to companies). They may be resident in Norway or abroad.
The tax on share income for the Investor will depend much on the location and nature of the Investor, but also on the nature and location of the Investment:
-Corporate Investors resident in Norway: The corporate tax rate is generally 22% in Norway. But share income from certain companies in certain countries (“exempted Investments”) is tax exempt (nil on gains and up to 0.66% on dividends) for qualified companies. Namely «the tax exemption method».
-Physical Investors resident in Norway: Personal Investors pay 22% tax on capital income (e.g. on bonds) and a quite heavy tax on share income (31.68% less a risk-free relief stated after the year end, p.t. 1.3% for 2019).
-Investors resident abroad (“foreign Investors”): Foreign Investors are mainly taxable to their home countries. But dividends from a Norwegian limited company to a physical or non-exempted corporate Investor (including a foreign Partnership) are also subject to withholding tax (“WHT”) to Norway at up to 25%. The WHT rate will never exceed the local tax in Norway cf. above. Further, the WHT may be limited and even abolished by cross-border tax agreements. The foreign country must usually deduct the WHT from local tax if any, upon claim from the Investor.
2. Mutual funds – introduction
The Fund Investors are not responsible for the liabilities of the Fund. They can only lose the invested money. The Fund shares are redeemable and typically offered to an undefined group of Investors. But the Fund might to a certain extent invite a certain customer base. Further, the Fund may require a minimum investment without losing its status as a Fund.
For the Investor, latent loss/gain/return in the Fund will only be taxable in Norway upon payments from the Fund to the Investor or sale/redemption of shares.
The income tax and wealth tax for the Investor will firstly depend on the investment ratio of the Fund, between shares and bonds. Secondly, the tax will depend on the residence and nature of the Investor (corporate/physical).
2.1 Taxation of the Investors in Funds
2.1.1 Payments from a Fund resident in Norway
The tax to Norway on payments from the Fund to Investors depends on the ratio between bonds and shares at the beginning of the fiscal year (year end if established during the year).
-If the Fund holds more than 80% shares, it is considered 100% invested in shares.
-Does it hold less than 20% shares, it is considered 100% invested in bonds.
-Between 20% and 80% shares, the Investors are taxed based on the average ratio between bonds and shares in the beginning of the fiscal year (year end if established during the year).
-Return on bonds from the Fund: Both physical and corporate Investors resident in Norway pay 22%. Foreign Investors pay nil.
-Return on shares (dividends) from the Fund:
Physical Investors resident in Norway pay 31.68% (less a risk-free relief).
Corporate Investors resident in Norway pay 0.66% if both the Investor and Investment qualify for the tax exemption method. If not, they pay 22%.
Foreign physical and non-exempt corporate Investors are subject to WHT to Norway by up to 25%. The rate will never exceed the local tax in Norway cf. above.
2.1.2 Gains on the sale/ redemption of shares in the Fund
Foreign Investors pay nil tax on gains.
Residents in Norway: The gains tax for residents in Norway upon the sale of shares in a Fund depends on the average ratio between bonds and shares cf above, in the beginning of the first year and the last year of ownership cf. above.
Bonds: Investors resident in Norway pay 22% on any gain on bonds. This applies to both physical and company Investors.
Shares:
– Physical Investors pay 31.68% on gains from shares.
– Corporate Investors pay nil on gains from shares if they qualify for the tax exemption method. If not, they pay 22%.
2.1.3 Wealth tax
The wealth tax is levied on Investors resident in Norway only. It is based on the tax value as per the fiscal year end (the beginning of the assessment year);
– Physical Investors pay a wealth tax of 0.85% on total net taxable wealth exceeding MNOK 1.5. The value includes 100% of the tax value related to bonds and 75% of the tax value related to shares according to the ratio as described above.
– Corporate Investors do not pay any wealth tax.
Fun fact II: The ratio-rules for Funds may cause delay and struggle for Fund Investors in Norway holding shares in foreign Funds. Upon lack of information from a foreign Fund, the Investor must prove the ratio between shares and bonds. If the Investor fails to prove the ratio, all payments and gains will be taxed as capital income (22%). This is interesting for physical Investors, as the tax on share income is quite higher than 22% (31.68%).
2.2 Taxation of a Fund in Norway
A Fund is a taxable entity (non-transparent) in Norway. I.e. if the Fund is managed from Norway, it is also taxable here. Regardless of where in the world the Fund is registered and/ or established. Regardless of which market it wants to address. Irrespective of which laws it is governed by. Hence, a Fund established and registered in a “tax paradise” and managed by Norwegian entities or people, may still be taxed in Norway.
The corporate tax rate is 22%. Funds do not pay any wealth tax.
Kick-back from underlying investments is taxed as corporate income at 22%.
The Fund may deduct payments to Investors deemed as return on bonds based on the shares/bonds ratio, cf. above.
An exempted Fund will be tax exempt for loss and return on its share Investments. Any gains/loss on shares in limited companies outside the EEA is not taxable/deductible for the Fund.
3. Private equity – an introduction
A private equity (“PE”) structure may be set up in various ways:
A minimum investment will normally be required. High yield may only be expected long term. Ownership and sale are usually offered to a determined group of Investors (shareholders / limited partners, “LPs”). The company is often set up by a Founder (founding shareholder/ general partner/ “GP”). The Founder/GP will often establish a separate company (Advisor) to find and negotiate deals. Sometimes the Founder/GP also sets up a separate company to provide business management/ administration.
3.1 Limited PE companies (non-transparent entities)
A PE may be set up as a limited liability company/ Investment company. (Or a foreign non-transparent partnership). The Founder (sml. GP in Partnerships) may still hold an amount of the shares (typically with extensive voting power) but will not be held liable for the debt. The Founder may set up a separate Advisor/ Management company or do all the work itself.
3.1.1 Taxation of the PE Company
Dividends from a Norwegian PE Company to the Investors are not deductible for the company.
Management fees will not necessarily be tax deductible for the Norwegian paying PE Company. Even if it is considered as corporate income for the Advisor. Management fees should be split into non-deductible share costs (typically costs of deals within the tax exemption method) and deductible (taxable) costs. The split should be stated based on well-founded principles and reasons. Examples of deductible costs may relate to the holding of the investments. Tax deductible are typically overhead costs like administration, strategy work, financing, marketing and company restructuring.
Fees related to non-deals/ broken deals will never become deductible if the broken deal relates to tax exempt income.
As to the Investments of the PE, the PE Company will be taxed as a corporate Investor cf. above.
Fun fact III: The PE Company’s return on bonds and other taxable corporate income will be taxed twice for physical Investors in Norway: First at 22% in the company and then at 31.68% when paid to physical Investors. Thus, physical Investors should consider investing in bonds directly (and only be taxed at 22%).
3.1.2 Taxation of the Advisor:
Success fee (or carried interest, “carry”), e.g. upon a successful exit, is taxed as corporate income at 22% for a Norwegian Founder/ Advisor.
Some deals will not take place, even if the Advisor has made a big effort to negotiate them. The fee received for such work is still taxed as corporate income at 22% for the Norwegian Advisor.
Moreover, physical working Investors/Advisors may become heavily taxed in case of profit split in favor of the Advisors. This may happen to “misallocated” return. A part of the profit exceeding a “normal” return on capital may be deemed as salary for the working Investors. Good allocation may be achieved by way of share classes/ preference shares.
3.1.3 Taxation of the Investors/ shareholders
A limited company is usually a separate tax unit in Norway (non-transparent).
Exceptions from the non-transparency may apply if the limited company is set up in a low-tax country but controlled by Norwegians. Then Norway may tax the Investors annually based on the company’s annual profit, as if the company were a Partnership (cf below). The tax cost price will then be adjusted accordingly.
Fun fact IV: Norwegians can not easily escape from tax in Norway only by setting up a limited company in a tax paradise.
a) Dividends from a PE Company
Payments of profit from a limited company exceeding invested capital will always be taxed as dividends. This is predictable and simple for the Investors.
Tax on dividends depends on the nature and location of the Investor (corporate/physical), as well as the nature and location of the Investment.
Dividends paid to foreign non-exempted Investors are subject to withholding tax, cf. above.
-For physical Investors resident in Norway, dividends are taxed at 31.68% (minus a risk-free return). Payments made to foreign physical Investors may be subject to withholding tax in Norway at up to 25% (may be limited by way of double tax agreements).
-For company Investors in Norway, the question is whether the income is exempt (taxed at up to 0.66%) or not (22%). There are requirements for both the Investing company and the PE company.
-Payments made to foreign non-qualified corporate investors may be subject to withholding tax in Norway at up to 22% (may be limited by way of double tax agreements).
b) Sale of shares in a PE Company
Gain on shares in a limited company will always be taxed as income on shares. This is predictable and simple for the Investors.
-Corporate Investors resident in Norway: The corporate tax rate is 22% in Norway. But certain share income from companies in certain countries (“exempted Investments”) is tax exempt for qualified companies.
-Physical Investors resident in Norway: Personal Investors pay 31.68% tax on share gains.
-Foreign Investors: Gains on shares are not taxable in Norway for foreign Investors.
c) Wealth tax
Wealth tax to Norway is levied on physical Investors resident in Norway only. In other words, corporate Investors do not pay any wealth tax.
Shares in Norwegian (not listed) limited companies: 75% of the tax value of the company’s assets at the beginning of the fiscal year (year end if the company is established during the year or has bought another company by way of certain mergers).
Shares in foreign (not listed) limited companies: 75% of the market value (unless the Investor is able to prove the tax value of the company’s assets) at the end of the fiscal year.
3.2 PE Partnerships (transparent entities):
Private equity is often established as a limited partnership (transparent “Partnership”). The Partnership requires limited liability for the LPs. The Founder/ GP offers unlimited liability for the total debt. The GP should hold more than 0.1% of the shares. (Otherwise, the partnership may be treated as a taxable entity for Norwegian purposes, see below).
A Partnership as sketched above will be so-called “tax transparent” in Norway. Meaning that each Investor will be taxed directly for its own part of the profit of the Partnership. As if the Partnership did not exist. The Partnership will not be taxable as such.
A Partnership managed from Norway must file its own tax return, as if it were a tax entity. The total taxable profit will then be split to each Partner (Investors and GP). Payments will be allocated to each Investor and added to its taxable income. E.g. each Investor will be taxed in its home country for its part of the Partnership’s return, kickback and costs. Hence, the location of the Partnership does not decide the tax on the Investors in Norway.
3.2.1 Taxation of Investors in Partnerships
-Foreign Investors: LPs resident abroad do not pay tax to Norway on income from a Norwegian Partnership, unless they become taxable here because of the business as such. (However, our authorities are considering a new WHT on interest and royalty payments to related foreign companies).
-Investors resident in Norway: Because of the activity of the GP, the Norwegian physical Investors of a Partnership will be deemed as self-employed. (Just a reminder as the tax return filing deadline for self-employed is postponed until 31 August).
a) Annual taxation: The Partnership as described above is “tax transparent”. This means that the Investors will be taxed on income and wealth annually as if they held the Partnership’s Investments directly. The total profit of the Partnership will first be assessed in accordance with the rules on corporate tax, before allocated to the Investors. I.e. the taxation of an LP in Norway depends firstly on the nature of the LP (physical, exempt/ non-exempt corporate etc.) as well as those of the Partnership’s Investments (bonds, exempt/non-exempt shares etc).
b) Payments to physical Investors from the Partnership are taxed at 31.68% (less a risk-free relief), to non-exempted corporate Investors at 22% and to exempted corporate Investors 0-0.66%.
c) Gains/loss on shares: Upon sale, the Norwegian LP will roughly speaking be taxed as if the shares were shares in a limited company, cf. above.
However, foreign Investors may become victims of an exit-tax upon closing down, if they have become taxable to Norway through the Partnership´s assets.
Further, a sale of shares in the Partnership may still become taxable/ non-deductible for an exempted corporate Investor in Norway. That depends on the nature and location of the investments of the Partnership as such:
-A gain on the sale of shares in a Partnership will taxable for a corporate Investor in Norway if the total value of non-exempted Investments has exceeded 10% of the total share investments at any stage during the past 2 years.
-A loss on the sale of shares in a Partnership may only be deducted by a Norwegian corporate Investor if the Partnership has invested more than 10% of its total share investments in non-exempted companies continuously for the past 2 years.
Fun fact V: The above differences seem to confuse many Investors. Moreover, the General Tax Act was amended some years ago. Currently, loss occurred in a Partnership is not fully tax deductible for the physical/ non-exempted Investors. It can only be set off against matching income. Thus, Partnership as a PE structure is becoming less popular for physical and non-exempt Investors in Norway.