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Tax update, Summer 2020

It's been an eventful first half of 2020, and this also applies in the tax area. In this article our tax team gives an overview of some of the most important developments so far this year.

Measures resulting from the Covid-19 pandemic
Also in the tax area it is impossible to summarize the first half of 2020 without Covid-19 taking significant focus. One aspect of the government’s response to the pandemic and resulting shut down has been to introduce temporary tax measures to improve liquidity and stimulate investments. Below are to most important tax measures.

Carryback of tax losses for 2020
Carry back of tax losses for 2020 is allowed within certain limits. This entails that companies that face tax losses for 2020 are not left with carrying such losses forward against profits in later years, but may set off up to NOK 30 000 000 of losses from 2020 against taxed profits for 2018 and 2019. The set off will entail payment from the state of the tax value in the tax settlement in 2021.

Increased tax depreciation rate for investments in the “machines” group in 2020
The first year depreciation rate for investments made in 2020 in depreciation group d (the so-called “machine” group) is proposed increased from the regular 20 percent to 30 percent. The rule for now only applies for investments made after the effective date in 2020 and is awaiting ESA approval, but may be extended also for investments made in 2021.

Tax incentives for startups and investors
The government has proposed to widen the scope of the current option tax scheme for startups by
i)   widening the scope to include employees hired before 1st of January 2018,
ii)  increasing the employee maximum threshold for companies to qualify from 12 to 25 and
iii) increasing the max threshold on revenue and balance sheet from NOK 16 000 000 to NOK 25 000 000.

The proposal is that these changes will be permanent, but they are currently awaiting ESA approval.

At the same time the maximum deduction for equity investments in startups in 2020 for individual shareholders is increased from NOK 500 000 to NOK 1 000 000 per investor, while each start up may maximum receive NOK 5 000 000 in qualifying equity investments. As a temporary measure for 2020 and 2021 the scope of this investment incentive is also widened to include employees.

Postponed installment of company tax and finance tax
Advance payment of company tax is done in the year following the tax year and falls due with two installments, where the second installment for 2019 is now for most companies postponed from 15th of April to 1st of September 2020.

The deadline for payment of the salary component of the finance tax for March and April is postponed from 15th May to 17th August 2020.

Postponed installment of VAT
Payment of the first VAT installment is postponed from 14th April to the 10th of June 2020.

VAT reduction of the low rate
The low VAT rate generally applicable on personnel transportation, hotel sectors, public broadcasting, sporting events and amusement parks is reduced from 12 percent to 6 percent between 1st of April and the 31st of October.

Employer’s national insurance contributions
The employers’ national insurance contribution is reduced with four percent for May and June 2020. Reporting should be done using the regular rates and the reduction will be made by the tax authorities before payment of the installment is due.

In addition payment of the employers’ national insurance contributions for March and April 2020 is postponed from 15 May to 17 August 2020 and contributions for May and June are proposed to be postponed from 15 July to 15 October 2020. It should be noted that reporting in the “a-melding” is still required to be submitted electronically on the regular schedule. Wages/salary and other income must be declared in the a-melding for the month in which the payment is made.

Wealth tax payment
Wealth tax may be a significant burden on owners of companies that do not generate meaningful free cash flow available for the owner to cover such taxes. As a temporary measure for 2020 owners of companies that generate a tax loss for 2020 may for this year apply for a one-year postponement of payment of the wealth tax. The wealth tax must be at least NOK 30 000 in order to qualify for postponement.

Wealth tax rates
The discount element in the valuation of shares, business real estate and business assets for wealth tax purposes is increased from 25 percent to 35 percent for 2020. At the same time the max. valuation applicable for business real estate is reduced from 90 percent to 78 percent.

Postponed deadline for tax free transformation
The deadline for being able to transform a legal entity into a limited liability company with effect for the tax year is usually 1st of July in the relevant year. This deadline has for 2020 been postponed to 1st of September 2020.

Cancellation of dividends approved by the general meeting
Under normal circumstances, a company’s ability to prior to payment cancel or reduce dividends already decided by the general meeting with effect for taxation of the shareholders has been considered very limited.  Norwegian tax authorities have however issued an interpretation stating that such revision of discussion to distribute dividends may in the current situation have tax effect. Certain conditions apply, including that no dividend payment has been made and that the reversal is based on securing liquidity and equity following the pandemic.

Oil and gas investment incentives
Following a more restrictive initial proposal, agreement was later reached between most political parties in June 2020 for a temporary incentive scheme supporting investments on the Norwegian Continental Shelf. The main features of the incentive scheme is immediate tax deduction for investments in the special 56 percent tax and additional uplift in the special tax.

Under the proposal investments made in 2020 and 2021 are immediately tax deductible in the basis for additional special tax (56 percent tax rate that comes in addition to the ordinary company tax rate of 22 percent).

Investments made in later years may also qualify if they are made in accordance with a Plan for Development (PDO) or a Plan for Installation and Operation (PIO) filed before 1 January 2023 and approved by the Government after 12 May 2020 and before 1 January 2024, provided such investments are made in the year of or prior to planned “first oil” defined in the approved PDO/PIO.

In addition to the immediate tax deduction uplift in the special tax is increased from 20.8 percent to 24 percent.

In order to further improve liquidity, payment will be made by the state of the tax value of losses and unused uplift through negative tax instalments.  The tax value of losses incurred in 2020 and 2021 (in both the ordinary tax base and in the special tax base (including the uplift of 24 percent) will be refunded by the state through negative tax instalments. Such installments will be paid in six instalments throughout the year based on the expected tax value for the income year.

The anti-avoidance rule and pre-transaction demergers
From 2020 Norway has had a statutory general anti avoidance rule replacing the non-statutory rule.

Under the non-statutory rule the Supreme court in the ConocoPhillips III judgment established that the sale of real estate which was conducted by first carrying out a demerger of such asset and subsequently selling the shares of the demerged entity qualified for tax exemption under the participation exemption method. The fact that a sale of real estate directly would have entailed a taxable capital gain, while the chosen transaction structure entailed that the gain on shares was tax-free, did not constitute anti-avoidance.

The judgement has established a general practice whereby such pre-transaction restructuring is not considered to constitute anti-avoidance, but rather an acceptable adaptation given the underlying principles and purpose of the participation exemption method. The continued application of this principle under the statutory anti avoidance rule was confirmed by the finance committee recommending to the parliament that the practice supported by ConocoPhillips III “will not be changed as a result of the adoption of a new provision in section 13-2 of the Taxation Act”.

The finance ministry then in the revised national budget for 2020 put this issue in doubt when commenting that it was unclear whether the finance committee’s recommendation referred to specific Supreme Court practice related to transfer of real estate or to the tax authorities’ subsequent practice comprising transfers of all types of assets, including business activities. The ministry interpreted the recommendation in such a way that the statutory anti avoidance rule could be applicable for other assets than real estate spun off to be sold tax exempt under the participation exemption method.

A majority in the finance committee in the parliament has subsequently removed the uncertainty that these statements created by supporting that the practice established by the tax authorities, comprising transfers of all types of assets, should be continued under the statutory rule.

Taxation of three percent of distributions from one tax transparent entity to another
The Norwegian participation exemption establishes that three percent of distributions that are otherwise tax exempt under participation exemption rules is taxable for the recipient unless the companies are  a part of a tax group (above 90 percent ownership).

For controlled foreign corporations (CFCs) and tax transparent entities such as partnerships the three percent taxation only applies to distributions received from limited liability companies. The Government is of the view that this was not an intended limitation and that the three percent taxation should also apply to distributions from tax transparent entities.

Proposal for withholding tax on interest and royalties
The Norwegian Government has published a hearing proposal for establishing 15 percent withholding tax on interest, royalty and certain rental payments payable by a Norwegian person to a related foreign party. The proposed effective date is 1 January 2021.

The main criteria under the proposal are that the recipient of the payment is a related party tax resident of a low tax jurisdiction.

Real estate tax
The planned decrease on maximum real estate tax for residence and holiday homes from 0.5 percent to 0.4 percent was in the revised budget for 2020 postponed to 2022.

A production tax, but no resource rent tax or similar profit based tax on fish farming
The production tax is proposed set to 0.40 NOK per kilogram produced fish and the proposed effective date is 1st of January 2021. The tax applies for farmed salmon, trout and rainbow trout and the revenues will be distributed between the local municipality and region.

Brexit has for many of us taken somewhat of a back seat given the focus of Covid 19. However, also on the tax side Brexit is still an approaching event with largely unknown consequences. Norway has signed a postponement agreement with the UK relating to the UK’s withdrawal from the European Economic Area (EEA) entailing that the relationship between Norway and the UK will not change until the end of the transition period 31 December 2020. This means that for tax, VAT and regulatory purposes no changes will take place prior to expiry of the transition period.

However, uncertainty still remains on what the situation will be after 2020, if the transition period expires and Norway would have to negotiate directly with the UK. Norwegian tax rules such as the participation exemption rules in many relations treat tax payers and investments in tax payers tax resident in the EEA different than those tax resident outside of the EEA.