Newsletter on the Norwegian State Budget 2008
| 8th October 2007Read the newsletter from Wikborg Rein's Tax Group on the Norwegian State Budget 2008.
STATE BUDGET 2008 - TAX AMENDMENTS
As announced, the state budget presented on 5 October contained essential proposed amendments to the tax regime for shipping companies.
The key points are:
• Companies within the current shipping tax regime will be taxed on accumulated non-taxed profits, but not on unrealized gain on vessels exceeding book value
• The calculated tax may be divided over ten years and reduced by 1/3 used for environmental purposes
• The new regime results in a final tax exemption on shipping profits and gains
• The new system is an adjustment and expansion of the current regime
Other interesting proposals include (1) the introduction of exit taxation for SE companies moving out of Norway, (2) changes to the NOKUS (CFC) legislation, (3) changes to the scope of the exemption method’s application with respect to holding companies within the EU/EEA, and (4) changes to the taxation of hydro electric power (not covered herein). The state budget also contains suggested changes which have special consequences for wealth taxation.
1 TAX REGIME FOR SHIPPING COMPANIES
1.1 The current tax regime
Under the current shipping tax regime shipping income is not taxed as long as it is maintained by the shipping company. However, such income is taxed upon distribution of dividends or if the company exits the regime.
1.2 The proposed new tax regime
The Government’s proposed new tax regime includes a final tax exemption for shipping income.
The regime will be based on the same rules as the current regime, but with some adjustment since it will include a final tax exemption. Income from all the allowed shipping activities of the shipping company will be exempt from taxation, including charter income, proceeds from sale of vessels and sale of shares in other companies.
Tugboats with no more than 50 percent port activities will also be allowed within the regime.
The proposal includes an extension of the shipping activities that are allowed within the regime. Strategic and commercial management of own vessels, or vessels owned by related parties, will be allowed within the tax regime. Other activities which are closely related to the shipping activities will also be allowed. The Government will soon present the details of this in separate regulations.
As under the current regime, financial income will be taxable. The limitation under the current regime regarding loans and guaranties to entities outside the tax regime will still apply, but might be abolished at a later stage. The limitation with respect to 70% equity will also remain in force.
The company will be allowed to distribute dividends and make group contributions to owners outside the tax regime without any taxation.
There is no requirement that the companies must be within the shipping tax regime for a certain period of time, except that the companies must own qualifying assets to remain within the regime – i.e. if all are sold, the companies are considered to have exited the regime. However, there are limitations with respect to distributions of the calculated gain from entering into the new regime. This shall prevent the companies from distributing the calculated gains to the owners outside the regime before the gains are taxed, while the companies shall be allowed to distribute the accrued exempted income from the new tax regime.
1.3 Comparison with other shipping tax regimes
The new proposal is both more liberal and more restrictive than some of the alternative regimes in the EU. It is more liberal in that an unconditional tax exemption is introduced, not only on running profits, but also on gains from sale of qualifying assets. Further, there is no requirement to have strategic and commercial control in Norway.
On the other hand, the proposal is more restrictive than some of the EU regimes in that the companies may only be engaged in shipping activities. Restrictions to lending and guaranties to companies outside the regime are also retained.
1.4 Transitional rules
1.4.1 Exiting the existing shipping tax regime
The current tax regime will be abolished from 1 January 2007 and replaced with the new regime. Companies within the current regime must choose between a normal exit of the current regime as of 31 December 2006, or enter into the new tax regime.
Companies within the existing regime that do not choose to enter the new regime, will be taxed on non-taxed profits accumulated during the period the company was within the shipping tax regime as well as on unrealised gains on assets/vessels. A gain may be put on the gain- and loss account and taxed under the declining balance method. Exiting the shipping tax regime under these rules will result in considerable taxation, especially taking into account the generally high ship values in the current market.
For companies that choose to enter into the new shipping tax regime, the proposed transition rules will result in considerable tax advantages. It is thus expected that very few companies will choose not to enter the new regime.
1.4.2 Companies within the existing shipping tax regime that choose to enter the new regime
If the company chooses to enter into the new regime, the difference between the cost price and market value, i.e. all un-taxed reserves, will be taxed, since the new regime gives a final tax exemption for all future income and gain. When calculating the un-taxed reserves the exit value will be calculated as follows:
• Financial assets and shares in other companies that will be tax exempt according to the exemption method shall be valued at cost price, i.e. no gain;
• Other financial assets shall be valued based on their tax value (since these assets will not be tax free in the new regime);
• Other assets, in particular vessels, shall be valued at book value according to the company’s financial accounts (the Government concludes that the book value will fairly represent the market value);
• Debt shall be valued according to the tax value.
The total value based on the calculation above shall then be reduced to account for taxed income and previously paid in capital in the company. If this results in a gain, at least two thirds of the gain shall be taxed over a period of 10 years, while up to one third can be allocated to a special fund for environmental measures in the shipping companies. If the calculation results in a loss, the loss cannot be utilised. The fund for environmental measures can only be used for certain measures that will be further outlined in regulations. Any unused part of the fund after ten years will be taxed. If the company chooses to exit the tax regime before the expiry of the ten year period, the remaining untaxed gain and unused fund for environmental measures will be taxed immediately.
As mentioned above, the main assets shall be valued based on the book value in the financial accounts. As the companies may use different valuation principles in their accounts, the Government will give further regulations to adjust for differences in the accounting principles.
1.4.3 Companies outside the existing shipping tax regime that choose to enter the new regime
Shipping companies that are not subject to the current tax regime may also enter into the new regime. These companies must calculate the untaxed reserves based on market values at the time they enter into the new regime.
For companies entering into the new regime in 2007 or 2008, the calculation will be based on the book value in the accounts, as described above. Since there may be differences between the book value and the market value, the proposal includes a special taxation rule whereby sale of assets within the first three years after entering into the new regime will be taxed.
From 2009, the calculation upon entering into the new regime shall be based on actual market values. The gain shall be put on a gains- and loss account, from which 20 percent shall be taxed each year, on a declining balance basis.
1.5 Exiting the new shipping tax regime
Except for the special transition rules described above, exiting the new shipping tax regime will not result in taxation. The proposed legislation regarding exit is thus mostly related to the establishing of cost price and depreciation values.
Finally, it is proposed that group contribution cannot be given with tax effect the two first years after exiting the regime, a proposal intended to stop certain tax planning opportunities.
2 SE-COMPANIES – EXIT TAX UPON TRANSFER OF TAX RESIDENCY
An SE-company may transfer its registered office and may thereby also transfer its tax residency from one state to another within EEA without having to liquidate the company. In a statement of 31 August 2006, the Tax Directorate confirmed that such transfer may take place without resulting in tax consequences as if the company was liquidated.
The Government now proposes to introduce tax on unrealised gain on assets owned by Norwegian SE-companies upon transfer of tax residency, i.e. the company will be taxed as if it was liquidated. To what extent capital gains tax arises depends on the general tax provisions. If assets consist of shares exempted from tax under the exemption method, the transfer of tax residency will not result in capital gains tax.
The new proposal will not have any impact on the taxation of shareholders, i.e. under Norwegian tax legislation transfer of tax residency of an SE-company will not have any tax consequences for shareholders.
The new tax provisions are proposed with effect from 4 October 2007, i.e. if the tax residency of the company is changed under Norwegian tax legislation or a relevant tax treaty after 4 October 2007, the company will be subject to exit tax.
3 NOKUS TAXATION
3.1 Changes in NOKUS legislation to adjust for Cadbury Schweppes
The NOKUS-provisions pertain to Norwegian taxpayers who own or control directly or indirectly at least 50 per cent of companies (and other entities) resident in a low-tax jurisdiction. In that case, Norwegian shareholders will be subject to tax for their proportionate part of the calculated profits of the company. The NOKUS-provisions do not apply when the company is resident in a tax treaty country, unless the income is of mainly passive character.
In a case regarding the British CFC-regulations, the Cadbury Schweppes case (C-196/04), the European Court of Justice concluded that British CFC-regulation was not in accordance with the EU freedom of establishment. According to the decision a member state may only use CFC-legislation against a company resident in another member state if they are “wholly artificial tax arrangements”.
The Government now proposes to change the wording of the Norwegian CFC (NOKUS) regulations in order to comply with the decision. Under the proposal the scope of the Norwegian CFC-regulation should not include companies (or other entities) established within the EEA that perform genuine economic activity in the state where the entity is established. The Norwegian shareholder has to substantiate that this is the case.
Whether the company performs genuine economic activity will depend on an overall consideration where it is essential that the company participates in a constant and permanent manner in the business activities of the state of residence. Whether this is the case must be considered on a case-by-case basis where relevant factors are the existence of premises, inventory and equipment in the state of residence, if the company has a permanent management and other employees in the state of residence carrying out the business activities and whether such persons have sufficient qualifications, competence and authority to run the business and take decisions in that respect. In addition, the entity must have economic substance. If the company mainly takes part in group transactions, it must be substantiated that the services are necessary and actually add value to other companies in the group.
The amendments will be effective from the income year 2007, but as the Cadbury Schweppes decision overrules the CFC provisions, they will have effect also before 2007.
3.2 Changes in NOKUS legislation to incorporate the exemption method
The Government has also proposed a few clarifications to the NOKUS legislation to ensure that NOKUS-shareholders do not become subject to tax on income which should be exempt under the exemption method.
Under the exemption method, income on qualifying shares shall not be taxable as NOKUS-income for NOKUS-shareholders who qualify under the exemption method.
Also, the proposal clarifies that income exempt according to the exemption method shall be included when regulating the tax base on shares in a NOKUS-company for shareholders who qualify under the exemption method.
4 PROPOSED LIMITATIONS TO THE EXEMPTION METHOD
The Government proposes to introduce certain limitations to the application of the exemption method with regard to investments in companies within the EEA. Only companies within the EEA that are genuinely established within the EEA and perform genuine economic activity in the state where it is established will qualify under the exemption method. The considerations with respect to genuine economic activity should be similar to the considerations upon application of the CFC-provisions as described above. Also upon application of the exemption method the shareholder has to substantiate that the conditions are fulfilled.
The limitation will i.a. imply that upon distribution of dividends from Norwegian companies to corporate shareholders within EEA only companies that perform genuine economic activity are entitled to nil withholding tax under Norwegian tax provisions.
These amendments will be effective from the income year 2008.
5 OTHER ISSUES
5.1 Assets that are temporarily located within Norwegian tax jurisdiction
• For taxpayers who are domiciled in EEA countries, the Government will introduce declining-balance depreciation for assets that are temporarily located within Norwegian tax jurisdiction, instead of the current straight-line depreciation. This is of particular relevance to rigs and ships. The ESA has indicated that the current rules may not be in conformity with the provisions of the EEA Agreement on the freedom to provide services to customers in other EEA states.
5.2 Income Tax
• The Government proposes amendments in the transition rules of the 2006 Tax Reform so that shareholders, under certain conditions, can claim an adjustment of the input value and basis for calculating the tax-free allowance on the shares if the shareholder received a reduced RISK-amount due to dividends not received. (RISK is the Norwegian abbreviation for the variation of the company's retained earnings after tax during the ownership of the shareholder.) Claims must be raised by 30 April 2008.
• The Government proposes amendments in the transition rules of the 2006 Tax Reform so that taxpayers who have owned partnerships through limited liability companies will not be subject to personal tax allocated from the partnership in 2005. The objective is to avoid triple taxation. Claims must be raised by the end of 2008.
• The Government proposes transition rules regarding adjustment of the input value and basis for calculating the tax-free allowance on shares when the company’s tax assessment for previous years is changed after 31 December 2005.
• Capital gains from the sale of agricultural land are to be taxed as ordinary income only (at a rate of 28%), and not to be included in computed personal income (at a rate of approximately 50%), if the aggregate annual gain is less than NOK 150.000.
• The tax exemption for income from letting more than half of one’s home for less than half of the calendar year is to be abolished. Low letting income is exempted through the introduction of an exemption limit of NOK 20.000.
• Government employees are to be taxed on the benefit from free housing abroad. This proposal will ensure the equal tax treatment of private sector employees and government employees.
• The Government will introduce a requirement for government employees to document actual lodging expenses from business travel, and any lodging allowance in excess of the documented expenses will be taxed. On domestic travels, government employees can still receive the minimum lodging allowance of NOK 400 without documenting actual lodging expenses.
5.3 Wealth Tax
• The 15% discount currently applied to the valuation of shares, primary capital certificates and equity fund units for wealth tax purposes will be abolished.
• The Government will tighten the so-called 80-percent rule, which curtails the wealth tax of those with relatively high taxable wealth and low ordinary income. The Government proposes an increase in the rate of wealth tax that has to be paid irrespective of the rule, from 0.6% to 0.8% of net wealth in excess of NOK 1 million.
• The assessed values of homes, holiday homes and other real estate, excep agricultural properties and power plants, will be increased by 10%.
• The minimum allowance against the wealth tax will be increased from NOK 220.000 to NOK 350.000.
5.4 Inheritance Tax
• The Government will introduce an annual tax exempt amount for gifts subject to inheritance tax, corresponding to one-half the basic amount of the social security system (2007: NOK 33.406). The amount will replace the exemption under the Inheritance Tax Act for so-called occasional gifts, i.e. gifts for birthdays, Christmas, weddings, etc. Unlisted shares, shares in partnerships or real estate will not be covered by the exemption. The annual exempt amount will be in addition to the general tax free amount of NOK 250.000 related to inheritance or gifts from one testator/donor.
5.5 Value Added Tax
• The commercial letting of holiday homes will be subject to VAT at a rate of 8%. Businesses that will be subject to VAT under these regulations can deduct all relevant input VAT.
For more information, please contact:
Marianne Iversen,
e-mail: miv@wr.no, tel. 22 82 76 33
Are Zachariassen,
e-mail: aza@wr.no, tel. 22 82 76 72
Petter Breivik,
e-mail: pbr@wr.no, tel. 22 82 76 30
Anders Myklebust,
e-mail: amy@wr.no, tel. 22 82 75 54
Jens Aas,
e-mail: jaa@wr.no, tel. 22 82 75 60
