Foundations with taxable activities must according to a new law proposal organize its taxable activities in subsidiaries
The term «næringsdrivende» (business activity) in the Norwegian Foundation Act shall be understood as activity with taxable profit («erverv til formål»)
The Ministry of Trade, Industry and Fisheries’ work on amending the Norwegian Foundation Act has been going on for several years, cf. proposals for a new Foundation Act in the NOU 2016: 21. Further law amendment proposals have now been proposed in a public hearing. The hearing deadline expires on 13 August 2021. We have taken a closer look at the most radical proposal, of which foundations shall not be able to conduct taxable activities directly in the foundation. Instead, such activities must be operated through subsidiaries.
The purpose is simplification
The purpose of the law proposal is to simplify the system of the Norwegian Foundation Act, as well as harmonize the rules with the taxation rules regarding tax-free enterprises that are operated on a non-profit basis, cf. Section 2-32 of the Norwegian Tax Act.
According to the current rules of the Foundation Act, there are two categories of foundations; business activity foundations and ordinary foundations. When registering in the foundation register, the foundation must state which category it belongs to.
To be considered as a business activity, the foundation must conduct an economic business with a certain duration and of a certain scope. The business must be suitable for making profits over time and must conduct a type of business that is normally operated to generate income. In assessing whether a foundation is a business activity, the type of business, size of business, income, financing, costs, etc. will be relevant. The assessment is discretionary, which makes it difficult both for the foundation to determine the category, and for the Foundation Authority to exercise control over whether foundations are business activity or not, cf. Section 4 of the Norwegian Foundation Act.
The Ministry believes that it entails further difficulties for the categorization of foundations, that the assessment in reality is influenced by the question of whether the foundation is exempt from tax liability pursuant to Section 2-32 of the Norwegian Tax Act.
In principle, there is no connection between the Foundation Act’s regulation of business activity foundations and the rules regarding tax exemption for facilities that are operated on a non-profit basis. The Norwegian Tax Administration determines independently the issue of tax liability, regardless of whether the foundation is regarded as a business activity foundation pursuant to the Norwegian Foundation Act. However, since the content of the terms is similar, the Ministry believes that confusion arises when categorizing a foundation’s activities when it should both decide whether the foundation has business activity pursuant to the Foundation Act and whether it is tax exempted under the Norwegian Tax Act.
On this background the Ministry has identified a need for simplification of the rules. Consequently, the Ministry has proposed to simplify the regulations by interpreting the term «business activity» in the Foundation Act to the same criteria as the term «acquisition for purpose» («erverv til formål») in the Norwegian Tax Act section 2-32. Only foundations that have acquisitions for purposes (and are liable to tax) are considered as a business activity.
The proposal entails that foundations with business activities – i.e. taxable activity – can only be operated in separate legal entities/subsidiaries that are not foundations. The foundation itself shall only safeguard ownership in the business activities.
The Ministry emphasizes that operating in a subsidiary rather than in the foundation itself will not affect the taxation of the foundation, except that the foundation will receive a share discount on asset values in the subsidiary.
Does it apply only for new foundations, or does restructuring need to be set up for existing foundations?
In order to avoid significant costs to restructuring of foundations, the Ministry has primarily proposed that the obligation to operate taxable activities through subsidiaries will only apply to foundations that are established after the new Foundation Act enters into force, or to foundations that enter into any new business activities after the new law has entered into force. However, the Ministry holds it open as to whether the new law shall apply to existing foundations, in combination with long-term transitional period (e.g. 10 years) before the foundation must be compliant with the new rules. Thus, the Ministry does not rule out that existing foundations that have taxable activity must restructure their activities.
Does the proposal really imply simplification?
An obvious question which raises due to the proposal is how the new definition of «business activity» will impact the assessment of whether the foundation is tax-free pursuant to Section 2-32 of the Norwegian Tax Act.
When foundations organize the activities in group-like structures, e.g. in underlying limited companies, the activity in the subsidiary will have to be taken into account when assessing whether the foundation as such is taxable. The subsidiary’s connection to the mother foundation’s non-profit purpose may be considered to be weakened when the activity does not take place in the foundation itself.
Another consequence of the new law proposal is that foundations with economic activity below the threshold values in the Norwegian Tax Act section 2-32, second subsection, will lose their tax exemption for turnover below the threshold values unless the underlying subsidiary also has a non-commercial purpose.
Furthermore, it cannot be disregarded that it may be easier for the Norwegian Tax Administration to conclude that the foundation as such is liable to tax because it by definition has «acquisition for purpose» as a result of the subsidiary’s activities. The Ministry itself has also pointed out that it cannot be ruled out that a shift in attention away from whether foundations engage in business activities in the sense of the Foundation Act, to whether they have a tax liability pursuant to the Tax Act, may lead to more foundations finding that they have a tax liability.
Even if foundations do not have acquisitions for purpose, they may have limited tax liability for wealth and income from economic activities pursuant to the Norwegian Tax Act Section 2-32, second subsection. However, many find it difficult to determine the limits for activities that will be defined as economic activity. Furthermore, foundations that engage in economic activity that directly realize the non-acquisition purpose may be tax-free as a subject. Here there are several grey areas that are perceived as difficult and complicated in practice. It is therefore unfortunate that the law proposal, which aims to simplify the rules, does not discuss this specifically.
If the proposed law is only to be applied to newly registered foundations, as well as to existing foundations that enter into new business activities, the consequence will be that there will be two different sets of rules that apply to foundations, where the individual foundation must look to the time of establishment of the business in order to apply the correct rules to the correct part of the business. Strictly speaking, it does not seem simplifying to have two sets of regulations for one form of organization.
If the new law shall apply to existing foundations that have taxable activity, they must restructure their activities in the future. Here it is important to remember that the current rules regarding restructuring of foundations are very restrictive. There are strict rules for converting foundations, so it will be difficult to share, merge or dispose of all or part of the business. For example, the rules regarding tax-free mergers/demergers pursuant to the limited companies’ legislation do not apply to foundations. Transitional rules that require the foundations to reorganize the activities can thus create major practical challenges, unless special conversion rules that enable adaptation of the activities to the new rules are adopted at the same time. For example, it should be considered to introduce a transitional rule that gives the foundation an exemption from tax liability when transferring business activities to subsidiaries.
The hearing also includes other proposals for law amendments that we only briefly mention here:
- Establishment of new foundations by electronic notifications to the Norwegian Foundations Authority («Stiftelsestilsynet»).
- New requirements for the name of foundations to contain the word «stiftelse» or the abbreviation «STI».
- Obligation to report certain accounting information directly to the Foundation Authority. The background is that it is no longer a requirement for small enterprises to prepare an annual report according to the Accounting Act applicable from 1 January 2018.
- Small money-donating foundations must have a basic capital of at least NOK 500,000. Alternatively, the Ministry proposes that small, money-donating foundations shall no longer be subject to supervision and auditing.
The public hearing note from the Norwegian Ministry of Trade, Industry and Fisheries dated 21 May 2021 may be read in full here: