The Tax Commission’s report

The proposals bear little resemblance to a tax reform, and in our view the report is unlikely to affect Norway’s competitiveness vis-à-vis our neighbouring countries.

There were high expectations for today’s report from the Tax Commission – perhaps particularly regarding which proposals would secure a broad political majority and bring about changes to the current tax system. The Tax Commission was tasked with recommending a comprehensive tax reform to help ensure a competitive tax level for Norwegian business. 

However, most of these measures merely reverse the most negative effects of the exit tax, combined with an increase in wealth tax for homeowners in central areas and a possible reduction in wealth tax for the very wealthiest capital owners. The proposed changes appear to have broad political support, and most of the dissenting votes have come from the external, non-political members. Many of the proposals have been put forward before, and several were expected. 

The most significant changes relate to wealth tax, where it is proposed that the tax base is increased whilst the rate is reduced. This will, for the most part, be financed by an increase in VAT. In addition, there are adjustments to income tax. The proposals are currently only on the drawing board and have been referred to the Ministry of Finance, and subsequently to the Norwegian Parliament, to develop them further. 

Wealth tax 

The Tax Commission proposes reducing the rate from the current two rates of 1% and 1.1% to a single rate of between 0.25% and 0.75%. In the Commission’s view, the rate should not vary within this range, but should remain fixed over time for the sake of stability. With the exception of one member, the Commission also favours a single, uniform rate. Some members propose that income tax paid in the same year, including tax on share income, should be deductible from the wealth tax. The wealth tax would then function to a greater extent as a minimum tax for the wealthiest individuals.

At the same time, the Commission proposes removing all valuation discounts, including those for shares, commercial property, aquaculture licences and primary residences. In return, it is proposed to increase the general basic allowance to NOK 2 million (from the current NOK 1.9 million), as well as to introduce a separate basic allowance for primary residences. The latter will depend on the final tax rate, but is proposed to be at least NOK 7 million if the rate is set at the upper end of the range.

Furthermore, the Commission proposes to introduce a more accurate valuation of holiday homes, without taking a position on a specific model. It is nevertheless emphasised that the changes should contribute to a more consistent valuation of holiday homes in Norway and abroad. The Commission also proposes that shares listed on the NOTC list or Euronext Growth be valued at market value, as the current practice of using net asset value does not reflect goodwill, know-how and intangible assets. No changes are proposed for unlisted companies.

The Commission also proposes that an investigation be carried out into whether public-law licences, such as fishing licences, should be included to a greater extent in the tax base. In practice, such licences are currently often valued at a very low value. This would primarily apply to unlisted companies, as the value for listed companies will be reflected in the market value of the shares.

Taxation of companies and shareholders

General 

It is proposed that the corporation tax rate remain unchanged at 22 per cent and that the exemption method be retained. It is also proposed that the shareholder model remain unchanged – with only some adjustments relating to the risk-free allowance. However, the Tax Commission recommends closely monitoring the rates and general rules, including any changes in our neighbouring countries. 

With regard to the risk-free allowance, the majority proposes that it should not be forfeited upon realisation but should be included in full in the calculation of gains and losses. To counteract the incentive to trade around year end, it may be considered to introduce a holding period requirement. Secondly, the majority believes that the risk-free return rate should be based on a long-term government bond rate, in line with the proposal from the previous Torvik Committee. The risk-free rate should be set at the average yield on ten-year government bonds without a premium.

Exit tax

The members of the Commission have different views on how the rules on exit tax should be structured. Under the current rules, 70 per cent of distributions must be used to pay off the exit tax liability. In practice, this means that the taxpayer may be left with little, or possibly no, funds once all deductions and tax due to Norway and abroad have been paid. The Commission as a whole agrees that the deduction rate under this so-called distribution rule should be reduced from 70 per cent to the dividend tax rate on share income (currently 37.84 %), and that a deduction should be granted for withholding tax paid to Norway. The proposal ensures equal treatment with taxpayers resident in Norway and reduces the adverse liquidity challenges arising under the current rules. 

The Commission points out that, for individuals expecting capital gains in excess of the existing basic allowance of NOK 3 million, the rules on exit tax may reduce the incentives to move to Norway. In light of this, the Commission recommends that an exemption from exit tax should be introduced for individuals with temporary residence in Norway. The Commission believes that a residence period exemption should have the same timeframe as the scheme in Denmark, where the exit tax does not apply to individuals who have been resident in Denmark for one or more periods totalling 7 of the last 10 years. 

The Commission further points out that consideration should be given to allowing a deduction for subsequent capital losses realised within three years of emigration. The aim is to mitigate the risk where a taxpayer moves to a country where no deduction is granted for subsequent capital losses either. 

The majority of the Commission members also agrees that the so-called 12-year rule should be retained, i.e. the deadline for payment of the exit tax. The minority believes that the basic allowance should be increased significantly to reduce the number of cases where the amounts involved are limited, and where the unrealised capital gain has not been a decisive factor in the decision to move abroad. 

The Commission also refers to the principle that only share gains and losses accrued whilst a person is resident in Norway should be taxed here. This principle underpins the current exit tax rules. However, for shares realised in Norway, the base value is normally set at historical cost, so that gains and losses accrued before the owner became resident in Norway are also taxed when the shares are realised here. The Commission believes this should be amended so that only capital gains and losses on shares accrued whilst individuals are resident in Norway are taxed here.

Capital gains tax on inheritance and gifts

Under current rules, there is tax continuity in the case of inheritance and gifts to individuals, but not when assets are transferred to companies (typically companies owned by children). The Commission believes there is a need to examine the rules on capital gains tax in the event of inheritance or the transfer of assets to companies by way of gift. The majority believes that such capital gains taxation should be limited to cases where deferred tax liabilities would otherwise lapse. Gifts to non-resident taxpayers domiciled abroad are taxed in accordance with the current rules on exit tax, and the proposal must be consistent with the exit tax. This proposal means that there will still be an inheritance tax in Norway, but one that is more concealed as a result of heirs having to assume the tax-based cost price of what they receive.

Option taxation for employees

The Tax Commission is proposing changes to the taxation of employee share options. It is proposed that the current special scheme for start-ups and growth companies, under which options are subject to capital gains tax upon the realisation of the shares, rather than being treated as income tax upon exercise, be replaced by a general scheme applicable to all companies. To counteract a shift in income from salary to options, several conditions are also proposed, including a minimum holding period between grant and exercise, a requirement that the exercise price must not be lower than market value, and that the scheme may be restricted to unlisted companies. The Commission also points out that the company’s right to deduct costs associated with the share option scheme could be disallowed, as the company is exempt from employer’s national insurance contributions.

If a general scheme is not introduced, adjustments are proposed to the terms of the current special scheme for start-ups and growth companies. It is proposed that the thresholds for balance sheet and operating revenue are increased to NOK 280 million, from the current thresholds of NOK 200 million and NOK 80 million respectively, so that the levels are harmonised with those in Sweden. It is also proposed to allow employees to receive share options in other companies within the same group. 

Synthetic shares

Synthetic shares are financial instruments with shares as their underlying asset. Typically, these are agreements that provide the same return as a share investment, based on the price performance of a specific share, but without the holder becoming a shareholder or acquiring ownership rights in the company. Such instruments fall outside the scope of the shareholder model (Norw: aksjonærmodellen). The return is therefore taxed as capital income at 22 %, whilst income from ordinary shares is taxed at 37.84 % under the shareholder model. 

The Commission recommends that the Ministry investigate further whether synthetic shares should be covered by the shareholder model, and thus taxed in the same way as shares, i.e. at 37.84 %.

Private consumption within companies

Private consumption within companies, typically where a shareholder uses the company’s assets for private purposes without paying the market price, or where the company sells assets to the shareholder at a reduced price, is taxable under current rules. However, the rules are difficult for the tax authorities to enforce. A proposal for special rules on the taxation of private consumption within companies was put out for consultation in 2022, but the proposal has not been followed up with a legislative proposal. 

The Commission proposes that the introduction of special rules for private consumption within companies should be reconsidered. The report does not contain specific proposals on how the rules should be designed, but according to the Commission, the special rules should be more targeted than the proposal that was put out for consultation in 2022.

Paid-up capital

The current rules on shareholder taxation are based on the principle that value created in a limited company shall be taxed as a dividend when distributed to an individual shareholder, or as a capital gain when the shareholder realises the share. Value inserted into the company is regarded as paid-in capital and is not taxed when repaid. Under the current rules, the tax position of paid-in capital follows the share, not the shareholder. The Commission recommends following up on the Government’s consultation proposal regarding amended rules for the repayment of paid-in capital. Regardless of which of the outlined solutions is chosen, the Commission believes that the measure will counteract undesirable tax planning and generate increased tax revenue in the long term.

Withholding tax on liquidation

Under current law, the liquidation of a limited company is regarded as the realisation of the shares in the company. Payments made upon liquidation are therefore taxed as capital gains, rather than as dividends, and consequently do not trigger withholding tax for foreign shareholders. The Commission recommends that a further assessment be carried out to determine whether payments upon liquidation that constitute retained earnings in the company should be classified as dividends so that withholding tax can be levied. Such a reclassification would reduce the tax planning opportunities for foreign shareholders in Norwegian companies and could increase withholding tax revenue.

Tax on gains on receivables

Outside the scope of business activities, a creditor’s gain on the realisation of certain receivables is exempt from tax. This exemption means that a private shareholder can realise a tax-free gain by purchasing a receivable at a value lower than its face value. The Commission recommends that the Ministry investigate whether changes should be made to the taxation of such receivables, either generally or more specifically targeting gains on receivables from companies controlled by the creditor. 

Tax on residential and holiday homes

A capital gain on the sale of one’s own home is tax-free if the property has been owned for more than one year and used as the owner’s own home for at least one of the two years immediately preceding the sale. A capital gain on the sale of a commuter home may also be tax-free under these rules. For holiday homes, capital gains on sale are tax-free if the owner has owned the property for more than five years and used it as their own holiday home for at least five of the last eight years.

The Commission considers it necessary to amend the rules on capital gains tax in order to reduce opportunities for circumvention under the current regulations. The Commission believes that an increased requirement for the period of residence and ownership, for example, to three years, possibly in combination with proportional taxation for periods during which the owner has not lived in the property, could limit the possibility of making the entire capital gain on secondary homes tax-free by moving into the property the year before the sale. The Commission is not putting forward a specific proposal, but asks the Ministry to consider the design of such a model, with an emphasis on simple and practicable solutions. The Commission believes there is a need for transitional rules for taxpayers who currently meet the conditions for tax exemption.

The majority of the Commission, all but one member, recommends that the current exemption rules for the taxation of capital gains on the sale of one’s own holiday home be repealed. Under the proposal, capital gains on the sale of a holiday home would become taxable in line with the main rule of the Tax Act, and losses would be tax-deductible. The majority of the Commission believes there are good reasons to consider transitional rules and to phase in the tax liability gradually over several years. The majority of the Commission believes that transitional rules should be introduced for individuals who currently meet the conditions for tax exemption under the existing rules, by adjusting the initial value of these holiday homes upwards to market value.

With regard to stamp duty, the Commission proposes that an adjustment relating to the first transfer of property is considered. In the case of the first transfer of entirely newly constructed buildings, stamp duty is calculated solely on the value of the land. This means that, from a tax perspective, it will often be more advantageous for a developer to demolish and rebuild, rather than to renovate by preserving the building or its load-bearing structures. The Ministry is therefore asked to investigate how this distortion can be corrected.

Personal income tax 

The Commission proposes a reduction in tax on wages, social security benefits and business income through a 0.5 per cent reduction in social security contributions. It also proposes that the personal allowance shall be increased by NOK 10,000 (which entails a tax relief of up to NOK 2,200 for individuals paying tax on ordinary income). The majority of the Commission, all but one member, also proposes a tightening of the rules by raising the age limit for the special personal tax allowance for pensioners, in order to strengthen the incentives to remain in work for longer. In total, the proposals result in an estimated tax reduction of NOK 18.5 billion. 

The proposals are based on the fact that an ageing population will increase expenditure on pensions, health and care, whilst growth in the working-age population is slowing. This contributes to a growing need to balance the budget. These developments therefore make it particularly important to facilitate high employment, so that more people can participate in the labour market.

Furthermore, the Commission proposes allowing the pilot scheme for tax relief on young people’s earnings to run its course before deciding whether to continue or extend it.

Value added tax and other taxes

There are currently three VAT rates – the low rate (12 %), the reduced rate (15 %) and the standard rate (25 %). The Commission proposes to reduce the number of rates from three to two by increasing the low rate to 15 %. This increase will particularly affect transport and hotels.

It is proposed that the current basis for VAT shall be extended to cover a range of services, such as non-life insurance, commercial sports activities, commercial courses and short-term letting of residential property via sharing platforms. VAT on non-life insurance is intended to replace the current financial tax on the sector and is estimated to increase revenue by NOK 2–3 billion. In addition, the Commission supports the phasing-in of VAT on electric cars in line with the Norwegian parliament’s request, with an estimated revenue of NOK 10 billion. 

The Commission believes that raising the registration threshold in the VAT register should be considered, which would result in administrative savings for businesses and the tax authorities. Furthermore, the Commission refers to the Torvik Committee’s observation that the exemption for the sale and letting of immovable property has significant negative effects, and that a mandatory VAT liability for the letting of commercial property is expected to result in major administrative simplifications for both landlords and the tax authorities. 

It is also recommended to investigate whether the rules on advance registration should be brought into line with EU rules, so that input VAT can be deducted from the outset. This is particularly relevant for businesses that are dependent on future licences or permits, for example in the offshore wind, onshore wind and carbon capture sectors. This has been called for by several industries, and will be particularly important for projects where it takes many years to obtain a licence, whilst significant costs are incurred in the meantime. 

The Commission also recommends investigating the replacement of the road usage tax (Norw: veibruksavgiften) with a kilometre charge covering all vehicles, including electric cars, which are currently not subject to the road usage tax. The kilometre charge is recommended as a first step, with a location-based road usage tax to be introduced in the longer term.