Tax Exemption for Companies’ Income from Shares

In its white paper on taxation presented today, the Government proposes that companies’ income from shares will be exempted from taxation. At the same time the right of companies to deduct losses on shares will be abolished. The intention is to avoid chain taxation. The amendments will have effect as of today,26 March 2004. A rough estimate of the revenue effect indicates that the proposed amendments will give an annual tax relief of five hundred million NOK.

The tax exemption model implies that limited companies are exempted from tax on dividends and on capital gains from the alienation of shares. At the same time the right to deduct losses on shares will be abolished. The companies will continue to be taxable on their current profits.

Corporate taxation should encourage efficient use of resources. Tax exemption for companies’ income from shares will prevent chain taxation where shares are owned by companies in multi tier corporate structures. This will enhance mobility of capital within the corporate sector. Furthermore, the exemption will reduce double taxation of cross-border income on shares. The introduction of the exemption model for companies’ share income will imply that the RISK scheme (Regulation of the share’s input value by taxed capital retained in the company) and the imputation system (giving – on certain conditions- the shareholder a credit for the tax already paid by the company) may be phased out entirely. Thus, the tax rules will become considerably less complicated, thereby reducing compliance costs for the companies and administrative costs for the tax authorities. The tax exemption model will be compatible with Norway’s obligations under the EEA Agreement.

The tax exemption model may give incentives to locate business activities in countries with low corporate taxation. Such incentives may be reduced by introducing a required minimum level of foreign corporate taxation as a prerequisite for exempting the share income from taxation in Norway. The Ministry will consider such limitations in the scope of the exemption when drafting the specific rules. For dividends distributed by Norwegian companies to foreign corporate shareholders, the Ministry proposes that the tax exemption model shall apply only to shareholders resident in EEA countries.

The Ministry will also consider an extension of the scope of the NOKUS scheme (Norwegian controlled foreign companies). The NOKUS scheme implies that Norwegian tax subjects controlling entities resident in tax havens shall be subject to current taxation on their part of the foreign company’s profit. The EEA Agreement and Norway’s tax agreements with other countries could, however, limit the application of the above mentioned scheme

The introduction of the tax exemption model would create substantial planning opportunities during a transitional period if taxpayers were allowed to deduct losses on the sale of shares before the tax exemption model enters into force, whilst deferring realisation of gains on shares tax free until such point in time. Such planning opportunities could entail considerable loss of revenue for the Government as well as disturbances in the share market. To prevent such circumvention possibilities the Ministry will propose that the tax exemption model shall have effect on share losses incurred and gains derived as of today, 26 March 2004. The Government will also propose that the tax exemption for dividends shall have effect for dividends derived as of 1 January 2004.