Annex 16 No 3907

Ref.
Ares(2014)75867 - 15/01/2014
CONTRACT
SI2.ICNPROCE009493100
IMPLEMENTED BY FOR
DEMOLIN, BRULARD, BARTHELEMY COMMISSION EUROPEENNE

- HOCHE - - DG ENTREPRISE AND INDUSTRY -
Study on Effects of Tax Systems on the Retention

of Earnings and the Increase of Own Equity
Jean ALBERT
Team Leader
- ANNEX 16 -
- NORWAY –
- COUNTRY REPORT -
Submitted by Rune JALVING

Country Expert
February 15, 2008

1
Norway Country Report
February 2008
NORWAY
Mazars Revisjon AS
Rune Jalving
Bogstadveien 27B
0355 Oslo
Norway
+47 23 19 63 00
INTRODUCTION
The Norwegian Parliament passed a major tax reform in 2004-2006, and the different
elements in the reform came into force from the taxation year of 2004-2006. This
reform replaced the last major Norwegian tax reform from 1992.
Until this tax reform, dividends were tax free for both private business owners and
corporate business owners. After the tax reform private business owners have to pay
28% tax on almost the entire dividend, giving a marginal tax rate of 48,16% for
distributed earnings. In reality the same rules applies to both limited companies and
partnerships.
The change in tax on dividends in 2006 was well known, and this encouraged
extremely high dividends in 2005 which was the last year with tax free dividends.
Most small and medium sized companies therefore reduced retained earnings to an
absolute minimum during 2005.
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February 2008
The main effect of the tax reform has in our view been:
1. Partners and shareholders that own the part/shares individually, retain
earnings in their Undertaking rather than distributing them.
2. An increased number of limited companies have been established by private
investors for the purpose of buying and selling shares without taxation
through their private limited company.
3. An increased number of tax free transformations from individual ownership of
shares and businesses to limited companies.
Conclusion
The Norwegian tax system has changed from encouraging distribution of earnings
prior to the tax reform to encouraging retention of earnings after the tax reform in
2006.
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February 2008
PART 1 – GENERAL QUESTIONS
1. What are the main characteristics of the tax systems applicable on enterprises
and business owners in your Country (corporate income tax, income tax,
capital gains tax, other profit based taxes, capital based taxes, other taxes)?
A flat tax rate of 28 per cent applies to corporate taxable profits (ordinary
income). The tax base is the sum of operating profit/loss, financial revenues
and net capital gains minus tax depreciation.
As from 2005, the general rules for the timing of income and expenditure for
tax purposes are no longer based on the accounting rules. Taxable income is
recognized when it is earned and expenditure when it is incurred, according
to the so-called realization principle.
Main legislation regarding taxation:
- Income Tax Act (“Tax Act”), dated 26 March 1999 no 14 with related
regulations
- Tax Assessments Act, dated 13 June 1980 no 24
- Petroleum Tax Act, dated 13 June 1975 no 35
- Inherance Tax Act, dated 19 June 1964 no 14
The Parliament (the Norwegian Storting) each year passes a resolution

determining the level of tax rates and government dues. The Tax Authorities
also publish a yearly guide describing practical tax issues.
1.1. Corporate Income
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February 2008
1.1.1. What are the general principles for the computation of taxable
profits?
The tax base is the sum of operating profit/loss, financial revenues and
net capital gains minus tax depreciation.
Capital Gains
The main rules in connection with taxation of capital income are found
in the Tax Act section 5-20 et seq. For corporations capital gains on the
sale of assets is treated as ordinary taxable income. Capital gains
deriving from shares are not taxable for limited companies. Taxation of
capital gains from the sale of fixed assets can be deferred by purchasing
other fixed assets that can be depreciated.
Depreciation
On the whole, declining balance depreciation is used for tax-related
depreciation. The main rules are found in chapter 14 in the Tax Act.
For tax depreciation purposes fixed assets are divided into 9 different
categories according to the expected life of the assets, cf. section 14-43
in the Tax Act. These are as follows:
Depreciation category Maximum tax

depreciation rate
a) Office equipment 30 %
b) Acquired goodwill 20 %
c) Goods vehicles 20 %
d) Passenger vehicles, machinery, furniture and 20 %
fixtures
e) Ships, vessels, drilling rigs, etc. 14 %
f) Aircraft 12 %
g) Plants for transmitting electric power and technical 5%
equipment in power plants
h) Buildings, hotels, restaurants, etc. 4(8) %
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February 2008
i) Commercial buildings 2%
The higher rate in h) applies if the expected life is less than 20 years.
The cost price of assets with an estimated life span of less than three years and of assets
costing less than NOK 15,000 may be deducted immediately.
Loss carry forwards

Operating loss carry forwards may be carried forward for an unlimited amount of
years, cf. section 14-6 in the Tax Act. Carry backs are not permitted, except in
connection with end of the business, cf. the Tax Act section 14-7. Carry backs in
connection with end of business is allowed for up to two years before the income
year.
1.1.2. What are the main differences between the tax balance sheet and
commercial balance sheet?
The principles for depreciation as well as rules concerning timing are

the main differences between the tax balance sheet and commercial
balance sheet.
In addition reserves for obsolete inventory, depreciation trade

receivables, and reserves for restructuring, pension, warranty and other
risks booked according to good accounting principles are not included in
the tax balance sheet.
As from 2005, the general rules for the timing of income and
expenditure for tax purposes are no longer based on the accounting
rules. Taxable income is recognized when it is earned and expenditure
when it is incurred, according to the so-called realization principle, cf.
the Tax Act section 14-2. The rule change have had little effect so far
since the earlier rule was that “reserves according to good accounting
principles” was not tax deductible. The change in legislation was made
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February 2008
as a consequence of the Supreme Court’s decision in the so-called
“Shell-case” (Rt 2004 s 1921), in which the company was entitled to
deduct estimated future costs for abbandonment of an offshore-
installation over the production period.
1.1.3. What are the most important adjustments for the computation of
taxable profits/taxable gains on the base of accounting profits?
The main difference is timing difference as described above:

The principles for depreciation as well as rules concerning timing are the
main differences between the tax balance sheet and commercial balance
sheet.
In addition reserves for obsolete inventory, depreciation trade

receivables, and reserves for restructuring, pension, warranty and other
risks booked according to good accounting principles are not included in
the tax balance sheet.
As from 2005, the general rules for the timing of income and expenditure
for tax purposes are no longer based on the accounting rules. Taxable
income is recognized when it is earned and expenditure when it is
incurred, according to the so-called realization principle, cf. section 14-2
in the Tax Act. The rule change have had little effect so far since the
earlier rule was that “reserves according to good accounting principles”
was not tax deductible.
We also has permanent differences, mainly are all gifts and mostly all
representation cost not deductible, cf. the Tax Act sections 6-21 and 6-
22 . In addition are dividends and other financial income or losses linked
with shares not taxable/deductible for corporations after the tax reform,
cf. the Tax Act section 2-38.
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February 2008
1.2. Income
1.2.1. What are the general principles of income taxation of business

owners on business income, wages, distributed earnings, interest on
loans and capital gain (sale of shares)?
The Norwegian tax system is been based on a two-tier structure, income

tax is levied on two different concepts of income: general income and
personal income. The main rules regulation general income is placed in
chapter 5 in the Tax Act, and rules relating to personal income in
chapter 12. In this dual income tax system, capital income (including
distributed earnings, interest and capital gains) earned by personal tax
payers is taxed as general income at a flat tax rate of 28 percent, whilst
income derived from labour and pensions are taxed progressively as
personal income up to maximum 47,8% on salary.
The flat 28 percent tax rate is also applied on the income of limited
companies and other corporate tax payers.
1.2.2. Is there a different tax treatment for income from different

income sources?
No, except for wages/pensions which are taxed at a higher rate.
1.3. Capital
A brief summary of relevant/applicable tax provisions is given hereunder. No
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February 2008
difference between partnerships and sole traders.
(When it is no changes between 2002 and 2006 only 2006 are filed in)
Norway RELEVANT TAX PROVISIONS AND SUBSEQUENT CHANGES

For CORPORATIONS (distinguish specific tax rates for SMEs)
2002 2003 2004 2005 2006
Corporate
tax
1. Tax rate 28 %
Standard 28 %
Reduced 28 %
Minimum Tax 28 %
Special Rates NA
Non profit Property tax
tax (local tax 0,1-0,7 % in some urban
on municipals. Real estate
corporations, transactions 2,5 % stamp duty.
energy tax…) Duty on energy
2. Tax Tax cost included deferred tax
accounting are booked as profit or loss and
rules owes tax and deferred tax are
booked in the balance
3. Booked depreciation not
Depreciation allowable for tax purpose
Basis Start with acquisition cost
Methods Declining balance method
Rates Office machinery 30%
Goodwill 20 %
Trucks, busses and taxis 20 %
Cars, Agricultural tractors,
machinery, tools, instruments
20%
Ships and drilling platform 14%
Planes 12 %
Power stations, power lines 5 %
Industrial buildings, hotels and
restaurants 4 %
Office buildings 2 %
Accounting Straight line depreciation
Intangibles Tax purpose 20 % declining
balance method. Accounting 5-
20 % straight line
Non Site
depreciable
assets
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February 2008
2002 2003 2004 2005 2006
4. Provisions
Risks and 0%
futures
expenses
Bad debts 0%
Pensions 0%
Repairs 0%
5. Losses
Carry 10 year 10 10 year 10 year No limit
forward year
Carry back 2 year with end of business
Transfer of Use of group contribution
losses
5.
Inventories
Valuation For tax purpose gross value, no
rules reductions
Allocation NA
methods
Personal
Income tax
Interest 28 %
Income
Dividends 0% 0% 0% 0% 28 %
Employment 13,5% 13,5% 13,5% 13,5% Tax: 28 % +9 %(394 100-
income (K289- (K320- (K340,7- (K354,3- 750 000)+ 12 % (above 750 000)
793,2) 830) 872) 906,9)
(19,5 % (19,5 (19,5% 19,5% Social security: 7.8 %
above % above above (uncapped)
K793,2) above K872) K906,9)
K830)
Capital gains
tax
Sale of fixed 28 %. House for private use tax
assets free after one year residence
Timing rules Possible to take 20 % of profit
yearly (declining balance
method)
Accounting Enter as income first year
rules
Inflation NA
Rates NA
Exemptions NA
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February 2008
2002 2003 2004 2005 2006
Sale of Tax free for corporations. For
shares private owned shares 28 % tax
on profit
Capital loss
Fixed assets 28 %
Shares No deduction for companies.
Private 28 % of loss
Wages
Average cost 14,1% 14,1% 14,1% 14,1% 14,1 %
to the +12,5% +12,5% +12,5% +12,5%
Undertaking above above above above
K607,2 K895,4 K930 K960,9)
Average cost Ca 35-40 %
to the
employee
Overall tax
on
distributed
earnings or
Dividends
Timing Taxable year of payment
Tax credit Taxable dividend are reduced
structure with ca 3 % of cost of shares
Excluding NA
non profit
tax
Including non NA
profit tax
Deduction of
expenses
General rule Yes
Non- Entertainment expenses, bribes
deductibility and gifts are non-deductible
of expenses
Thin Only in oil business off shore 20
capitalization %
Overall
corporate
tax on
Retained
earnings
Excluding 28 %
non profit
tax
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February 2008
2002 2003 2004 2005 2006
Including non 28 %
profit tax
Debt
financing
Interest Yes
deductibility
Limits on No
interest
deductibility
Interest Yes but interest are limited to
deductibility ca 3 %
on business
owner loan
to
Undertaking
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February 2008
For PARTNERSHIPS (distinguish specific rates for SMES)
2002 2003 2004 2005 2006
Tax
applicable to
partnerships
1. Tax rate 28 %
Standard 28 %
Reduced 28 %
Minimum Tax 28 %
Special Rates NA
Non profit Property tax
tax (local tax 0,1-0,7 % in some urban
on municipals. Real estate
corporations, transactions 2,5 % stamp
energy tax…) duty.
Duty on energy
2. Tax Tax cost included deferred
accounting tax are booked as profit or
rules loss and owes tax and
deferred tax are booked in
the balance
3. Booked depreciation not
Depreciation allowable for tax purpose
Basis Start with acquisition cost
Methods Declining balance method
Rates Office machinery 30%
Acquired goodwill 20 %
Trucks, busses and taxis 20 %
Cars, Agricultural tractors,
machinery, tools,
instruments 20%
Ships and drilling platforms
14 %
Planes 12 %
Power stations, power lines 5
%
Industrial buildings, hotels
and restaurants 4 %
Office buildings 2 %
Accounting Straight line depreciation
Intangibles Tax purpose 20 % declining
balance method. Accounting
5-20 % straight line
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February 2008
2002 2003 2004 2005 2006
Non Site
depreciable
assets
4. Provisions
Risks and 0%
futures
expenses
Bad debts 0%
Pensions 0%
Repairs 0%
5. Losses
Carry No limit
forward
Carry back 2 year with end of business
Transfer of Use of group contribution
losses
5.
Inventories
Valuation For tax purpose gross value,
rules no reductions
Allocation NA
methods
Personal
Income tax
Interest 28 %
Income
Dividends 28 %
Employment 13,5% 13,5% 13,5% 13,5% Tax: 28 % + 9 %(394 100-
income (K289- (K320- (K340,7- (K354,3- 750 000)+ 12 % above
793,2) 830) 872) 906,9) 750 000)
(19,5 % (19,5 (19,5% 19,5%
above % above above Social security: 7.8 %
K793,2) above K872) K906,9) (uncapped)
K830)
Capital gains
tax
Sale of fixed 28 %. House for private use
assets tax free after one year
residence
Timing rules Possible to take 20 % of profit
yearly (declining balance
method)
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February 2008
2002 2003 2004 2005 2006
Accounting Enter as income first year
rules
Inflation NA
Rates NA
Exemptions NA
Sale of Tax free for companies. For
shares private owned shares 28
%tax on profit
Capital loss
Fixed assets 28 %
Shares No reduction for companies.
Private 28 % of loss
Wages
Average cost 14,1% 14,1% 14,1% 14,1% 14,1 %
to the +12,5% +12,5% +12,5% +12,5%
Undertaking above above above above
K607,2 K895,4 K930 K960,9)
Average cost Ca 35-40 %
to the
employee
Dividends
Timing Taxable year of payment
Tax credit Taxable dividend are reduced
structure with ca 3 % of cost of shares
Deduction of NA
expenses
General rule Yes
Non- Entertainment expenses and
deductibility gifts are non-deductible
of expenses
Thin Only in oil business off shore
capitalization 20 %
Retained 28 %
earnings
Debt 28 %
financing
Interest 28 %
deductibility
Limits on No limit
interest
deductibility
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February 2008
2002 2003 2004 2005 2006
Interest Yes
deductibility
on business
Owner loan Yes but interest are limited
to to ca 3 %
Undertaking
1.3.1. Is there a different tax treatment between distributions of

earnings and capital gains realised by the sale of the business or the
shares in the undertaking?
CAPITAL GAINS FROM SALE OF SHARES IN LIMITED COMPANIES
Corporate Shareholders
According to section 2-38 in the Tax Act, Norwegian Corporate
Shareholders (i.e. limited liability companies and similar entities) are
not subject to tax on capital gains derived from realisation of shares in
companies which are resident within the EEA, while losses suffered from
such realisation are not tax deductible. Costs incurred in connection
with the purchase and sale of such shares are not tax deductible.
Individual Shareholders
Norwegian individual shareholders are taxable in Norway for capital
gains on the realisation of shares, and have a corresponding right to
deduct losses. This follows from section 10-30 et seq. in the Tax Act.
This applies irrespective of how long the shares have been owned by the
individual shareholder and irrespective of how may shares that are
realized. Gains are taxable as general income in the year of realisation,
and losses can be deducted from general income in the year of
realisation. The current tax rate for general income is 28 %. Under
current tax rules, gains or loss is calculated per share, as the difference
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February 2008
between the price of realisation and the individual shareholder’s
purchase price for the share.
The tax base of the share is gains exceeding a risk-free return on the
investment surplus tax free amount relating to the Shareholder Model
(only applying to Norwegian Individual Shareholders), may be deducted
from a capital gain on the same share, but may not lead to or increase a
deductible loss, cf. section 10-31 in the Tax Act.
The tax base of each share is based on the individual shareholder’s

purchase price for the share, adjusted for RISK-adjustments up to and
including the 2005 income year. (The RISK-method was the Norwegian
method for avoiding double taxation of a company’s profits and a
shareholder’s gain on the shares, effective until and including the 2005
income year.)
If an individual shareholder disposes of shares acquired at different

times, the shares that were first acquired will be deemed as first sold
(the “FIFO”-principle) upon calculating taxable gain or loss, cf. section
10-36 in the Tax Act. Costs incurred in connection with the purchase
and sale of shares may be deducted in the year of sale.
CAPITAL GAINS FROM SALE OF BUSINESS SHARES
Corporate Partners
Norwegian Corporate Partners (i.e. limited liability companies and
similar entities) are not subject to tax on capital gains derived from
realisation of shares in partnerships resident within the EEA, while
losses suffered from such realisation are not tax deductible. Costs
incurred in connection with the purchase and sale of such shares are not
tax deductible. This follows from the main rule in section 2-38 in the
Tax Act.
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February 2008
Individual Partners
Norwegian Individual Partners are taxable in Norway for capital gains on
the realisation of partnerships shares, and have a corresponding right to
deduct losses. Gains are taxable as general income in the year of
realisation, and losses can be deducted from general income in the year
of realisation, cf the Tax Act section 5-1 and chapter 9.
Retained earnings.
No further taxation will take place before the earnings are distributed
to the personal business owner(s).
1.3.2. Are there different tax treatments for long-term capital gains and
short-term capital gains?
No
1.3.3. Are there different tax treatments for capital gain from SME
business stock and capital gain from larger companies’ business
stock?
No
2. What are the main types of business entities and the main differences in
(corporate) income taxation for sole traders, general partnerships, limited
partnerships and corporation and other business entities if relevant?
The three main business entities are:
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February 2008
- Private Limited Companies
- Partnerships
- Self-employed employees
Limited partnerships do only exist to a very limited extent.
The main difference between the different business entities is that private limited
companies are treated as a separate tax paying entity, as opposed to the two other
types of business entities which will be taxed together with its owners (tax
transparency), cf. the Tax Act section 2-2 par. 2 and 3.
2.1. Are partnerships treated transparent for tax purposes?
Yes
2.2. Can partnerships opt for corporate income tax?
No
2.3. Once they have opted for a regime is it easy to switch back?
Not applicable
2.4. Is there a difference in this respect between general and limited

partnerships?
Not applicable
2.5. Can corporations opt to be treated tax transparent?
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February 2008
No
2.6. Once they have opted for a regime is it easy to switch back?
Not applicable
2.7. Are their differences in this respect between the different types of
corporations?
No
Table 3 INCLUDE RELEVANT TAX PROVISIONS IN 2002 AND

SUBSEQUENT CHANGES UP TO 2007
Norway General Limited Corporation Sole Trader
Partnership Partnership
Corporate 28% 28% 28%
tax
Income tax 28% *) 28 *) 28% *) 28-50,7%
Capital gains 28% 28% 28% 28%
tax (shares)
…
Option for N.A N.A N.A N.A
Transparent
treatment
…
*) with withdrawal and dividend to persons, totally 48,16%
3. Are there any special tax regimes for SMEs for (corporate) income tax
purposes?
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February 2008
No
3.1. What are the conditions to be fulfilled in order to benefit from these
special tax regimes?
Not applicable
3.2. Are there limits on the length of time during which these special tax
regimes are available, or other limits?
Not applicable
4. Are there any special tax incentives, such as (re-)investment reserves or

provisions, special depreciations/capital allowances deductible for
(corporate) income tax purposes?
There are few incentives as listed in the Norwegian tax system. One incentive
that can be mentioned is a regulation giving Undertakings the right to deduct
costs from research and development directly from the tax base of the
Undertaking. The rules are found in section 16-40 in the Tax Act. An
Undertaking involved in business activity is given the right to deduct up to 20
% of such costs from the tax base, but is however limited to NOK 4 million for
in-house research projects and NOK 8 million for projects commissioned to
research institutions. The Undertaking can deduct costs for both in-house
research project and project commissioned to research institution. The
project must be approved by the Research Council of Norway in order to
qualify for deductions.
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February 2008
4.1. Do these elements of internal financing represent an important
alternative to the financing by retained earnings?
No
4.2. Are there any compulsory measures in relation to the retention of

earnings (e.g. legal constraints for the distribution of profits and
dividend policy)?
Yes, ref below
DISTRIBUTION OF DIVIDENDS FROM A LIMITED COMPANY
The Norwegian Limited Companies Act contains regulations which work

as legal constraints for the distribution of earnings, cf. section 8-1 in
the law.
A limited company’s equity is divided in restricted equity and

unrestricted equity. It is only the latter type that can be distributed
freely as dividend to the shareholders. In order to protect the creditors
the Norwegian Limited Companies Act also contains other restrictions
when it comes to distributing dividends:
a) Dividends can only be distributed after a decision by the annual general

meeting, cf. section 8-2 in the Limited Companies Act.
b) Dividends can only be distributed if the equity is at least 10 % of the

values in the balance sheet, cf. section 8.2, 2nd paragraph in Limited
Companies Act.
c) Distribution of dividends must be in accordance with prudent and good

business practice, cf. section 8.2, 4th paragraph in Limited Companies
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February 2008
Act.
DISTRIBUTION OF DIVIDENDS FROM A PARTNERSHIP
In a partnership the partners have a personal and unlimited

responsibility for the partnership’s debts. The need for creditor
protection is not the same as for limited companies. The Norwegian
Companies Act therefore contains few constraints for distribution of
earnings from partnerships. According to the Companies Act section 2-
26, the partnership’s assets may not be distributed in so far this would
evidently harm the interests of the partnership or its creditors.
5. Are there any differences in the tax treatment of stock and cash
dividends?
No
However, it is not a common procedure to distribute shares instead of

dividends to the Norwegian shareholders. It is however a legally acceptable
choice. According to a formal opinion given by the Norwegian Department of
Finance, distribution of shares will not be taxed if the shares are given to the
owners in accordance with the original allocation of shares. If the distribution
of shares changes the ownership structure, the distribution will be considered
to be dividends and taxed as dividends according to the Shareholder Model,
see a closer description of the model in question 6.
6. Have there been any changes in the tax regulation in recent years – since
2002 – that have had an important effect on the retention of earnings, the
distribution earnings or the reinvestment of profits for a particular
purpose?
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February 2008
The Norwegian Parliament passed a major tax reform in 2004-2006, and the
different elements in the reform came into force from the taxation year of
2004-2006. This reform replaced the last major Norwegian tax reform from
1992.
The most important elements in the Tax reform of 2004-2006 will briefly be
described in the following. The different regulations will be explained in
greater detailed in part 2- 4 below.
Private (individual) business owners
The tax reform of 2004-2006 introduced tax on distributed earnings that was
earlier not subject to tax. The so-called Shareholder Model (also called the
Shielding Method for Personal Shareholders) came into force from 2006. The
main rules are found in chapter 10 in the Tax Act (section 10-10 et seq.).
Double-taxation was introduced for distributed earnings from both limited
companies and partnership. The shielding method implies that the dividends
exceeding a risk-free return on the investment are taxed as general income
with a flat tax rate of 28 % on the hand of the business owner, cf the Tax Act
sections 10-11 and 10-12. Before distribution the company has paid the
ordinary 28 % corporate tax on the operating profits. The total maximum
marginal tax rate is therefore 48.16 % (28 % + (72 x 28 %)) for distributed
earnings from both limited companies and partnerships.
Corporate business owners
In order to avoid chain taxation where shares, derivatives from shares and
some other financial instruments are owned by companies, the taxation of the
companies’ income from such instruments were abolished from 2004 – the Tax
Exemption Method, cf. section 2-38 in the Tax Act. This tax exemption applies
to both dividends and to capital gains. Correspondingly, capital losses on such
24
February 2008
instruments are no longer deductible. The method applies to private and
public limited companies and other companies of the same standing as limited
companies for tax purposes.
The Tax Exemption Method will apply to both domestic and cross border
income on shares. To prevent tax avoidance arrangements, the Tax Exemption
Method will not be applicable to investments in foreign countries outside the
EEA, unless the company has owned the shares for at least 2 years and the
ownership stake exceeds at least 10 % of the company, cf. section 2-38, 3rd
paragraph in the Tax Act.
The impact of the Tax Reform of 2004-2006
Many investors/business owners have adjusted to the new regulation

introduced in the tax reform. The main effect of the tax reform has in our
view been:
• Partners and shareholders that own the part/shares individually, retain

earnings in their Undertaking rather than distributing them.
• An increased number of limited companies have been established by
private investors for the purpose of buying and selling shares without
taxation through their private limited company.
• An increased number of tax free transformations from individual
ownership of shares and businesses to limited companies. More detailed
explanation in question 25.
7. Are there any current plans for tax reforms that have as their object to
have an impact of the retention of earnings?
No
25
February 2008
PART 2 – TAX ASPECTS OF RETAINED EARNINGS VERSUS DISTRIBUTED PROFITS AND
WAGES
8. What is the tax treatment of retained earnings compared to distribution of

earnings on the level of the Undertaking and at a combined level of
Undertaking (corporate) and business owner (individual)?
LIMITED COMPANIES
Taxation of earnings:
The Undertakings earnings are taxed as ordinary income with a flat tax rate of
28 %, cf. section 5-30 in the Tax Act. The tax base is the sum of operating
profit/loss, financial revenues and net capital gains minus tax depreciation.
Retained earnings are not taxed before distributed to the shareholders. A
limited company is not subject to net wealth tax.
Distribution of earnings:
According to the Tax Act’s main rule in section 2-38, Norwegian Corporate
Shareholders (i.e. limited liability companies and similar entities) are not
subject to tax on distributed earnings from companies which are resident
within the EEA.
Dividends distributed to Norwegian Individual Shareholders are taxable under
the so-called Shareholder Model. The main rules are found in chapter 10 in
the Tax Act (section 10-10 et seq.). The Shareholder Model implies that
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February 2008
dividends exceeding a risk-free return on the investment (the cost base of the
shares) are taxed as general income (28 % flat tax rate) when distributed to
individual shareholders, cf the Tax Act sections 10-11 and 10-12. The shielded
risk-free return is computed as the cost base of each share multiplied by an
annually fixed interest rate. For 2006 the risk-free interest rate was 2.1 %. If
the dividend for one year is less than the calculated risk-free interest, the
surplus tax free amount can be carried forward to be offset against dividends
distributed a later year, or against any capital gain (set off against losses are
not allowed) from the alienation of the same share. The maximum marginal
rate tax rate of distributed earnings to an individual shareholder will be 48.16
%.
PARTNERSHIPS
Partnerships are not separate tax entities, cf The Tax Act section 2-2 par. 2.
The partnership’s profit are nevertheless calculated on a net assessment basis
on partnership level as if the partnership was a separate tax entity. The result
is then divided between the partners according to the owner’s share in the
partnership, and then taxed as net taxable earnings or deductible loss, cf the
Tax Act section 10-41. The earnings are taxed as general income at a flat tax
rate of 28 %.
If the earnings are retained in the partnership (and not distributed to the
owners) no additional tax will apply before the earnings are eventually
distributed to the partners. The partnerships net wealth will however be
divided between the partners according to the owner’s share in the
partnership and taxed according to the rules applying for wealth tax, cf the
Tax Act section 4-40.
Distribution of earnings:
27
February 2008
A new taxation method was introduced for partnerships from 2006. The rules
are placed in chapter 10 in the Tax Act (section 10-40 et seq). The method is
called the Shielding Method for Partnerships, and means that only distributed
earnings exceeding a risk-free interest on the capital invested in the
partnership should be taxable. The partners will be subject to 28 % taxation
on distribution of earnings. In order to compensate for the initial 28 %
taxation, only 72 % of the distributed earnings will be taxable, cf the Tax Act
section 10-42 par. 3. The shielding method for partnerships will ensure the
same level of taxation for partnerships as for limited companies. The
maximum marginal rate tax rate of distributed earnings will be 48.16 % (0.28
+ 0.72*0.28)
SELF-EMPLOYED INDIVIDUALS
A new taxation method was introduced from 2006 to self-employed

individuals. The method is called the shielding method for self-employed
individuals and according to chapter 12 in the Tax Act, the method aims to
tax as personal income all business earnings exceeding a risk-free interest on
the capital invested. See a closer description of taxation of personal income
in question 23 point ii).
The shielding method for self-employed individuals will apply to all individual
persons who exercise some kind of business activity. The business activity
must be suitable for creating a profit and must be carried out for the owner’s
account and risk. It is further requirements concerning the activity’s extent
and duration, cf the Tax Act section 12-10.
8.1. Is there an economic double taxation of distribution of earnings

(taxation of Undertaking income and then taxation on the
28
February 2008
distribution of earnings at the Undertaking level or at the business
owner level)?
Yes
There is a double taxation of distribution of earnings. The Undertaking

will first be taxed for its income at a flat tax rate of 28 %. Distributed
earnings exceeding a risk-free interest on the capital invested will be
taxed with 28 % when distributed to individual shareholders or owners.
Distributions corresponding to a risk-free rate of interest are except
from double taxation under both the Shareholder Model and the
Shielding Method for Partnerships. The maximum marginal rate tax of
distributed earnings is 48.16 % for both limited companies and
partnerships.
A very important exemption from the main rules described above, is tax
exemption for earnings distributed to private limited companies. Since
these rules were implemented in 2004 the number of private limited
investment companies has increased due to the favourable tax rules
compared to the rules for individual shareholders. A private limited
company can receive dividends and realise capital gains from the
alienation of shares or ownership in partnerships without taxation.
INCLUDE RELEVANT TAX

PROVISIONS IN 2002 AND
SUBSEQUENT CHANGES UP
TO 2007
Norway Undertaking Individual
Business
owner
Corporate 28%
tax
Income tax 28% *) 50,7%
Dividend tax 0% *) 28% *)
Dividend 0% 0%
credit
29
February 2008
Capital gains 0% 28%
tax from
shares or
partnerships
Capital gains 28 % 28 %
tax from
sale of
assets
If option for N.A N.A
Transparent
treatment
chosen
*)Until/including 2005 dividend had a 0% tax rate. Total tax on distributed earnings
is 48,16%
30
February 2008
9. Please describe the differences in the tax treatment of distribution of
earnings realised as a capital gain in the context of a sale of the shares or
of the business compared to that (i) of retained earnings, (ii) of wages
salaries paid to the business owner and (iii) of a loan granted by the
Undertaking to the business owner?
CAPITAL GAINS FROM SALE OF SHARES IN LIMITED COMPANIES

According to the Tax Act’s main rule in section 2-38, Norwegian Corporate
Shareholders (i.e. limited liability companies and similar entities and
partnerships) are not subject to tax on capital gains derived from realisation
of shares in companies which are resident within the EEA, while losses
suffered from such realisation are not tax deductible. Costs incurred in
connection with the purchase and sale of such shares are not tax deductible.
Norwegian individual shareholders are taxable in Norway for capital gains on
the realisation of shares, and have a corresponding right to deduct losses. This
follows from section 10-30 et seq. in the Tax Act. This applies irrespective of
how long the shares have been owned by the individual shareholder and
irrespective of how may shares that are realized. Gains are taxable as general
income in the year of realisation, and losses can be deducted from general
income in the year of realisation. The current tax rate for general income is
28 %. Under current tax rules, gains or loss is calculated per share, as the
difference between the price of realisation and the individual shareholder’s
purchase price for the share.
According to the law’s section 10-31, the tax base of the share is gains
exceeding a risk-free return on the investment. Surplus tax free amount
relating to the Shareholder Model (only applying to Norwegian Individual
Shareholders), may be deducted from a capital gain on the same share, but
31
February 2008
may not lead to or increase a deductible loss.
The tax base of each share is based on the individual shareholder’s purchase
price for the share, adjusted for RISK-adjustments up to and including the
2005 income year. (The RISK-method was the Norwegian method for avoiding
double taxation of a company’s profits and a shareholder’s gain on the shares,
effective until and including the 2005 income year.)
If an individual shareholder disposes of shares acquired at different times, the

shares that were first acquired will be deemed at first sold (the “FIFO”-
principle) upon calculating taxable gain or loss, cf. section 10-36 in the Tax
Act. Costs incurred in connection with the purchase and sale of shares may be
deducted in the year of sale.
CAPITAL GAINS FROM SALE OF BUSINESS SHARES
Corporate Partners
Norwegian Corporate Partners (i.e. limited liability companies and similar
entities) are not subject to tax on capital gains derived from realisation of
shares in partnerships resident within the EEA, while losses suffered from such
realisation are not tax deductible. Costs incurred in connection with the
purchase and sale of such shares are not tax deductible.
Individual Partners
Norwegian Individual Partners are taxable in Norway for capital gains on the
realisation of partnerships shares, and have a corresponding right to deduct
losses. Gains are taxable as general income in the year of realisation, and
losses can be deducted from general income in the year of realisation.
i) Retained earnings.
No further taxation will take place before the earnings are distributed to the
32
February 2008
personal business owner.
ii) Wages salaries paid to the business owner.
LIMITED COMPANIES
Wages paid to the business owner would be taxed both as general income (flat
tax rate of 28 %) and as personal income (which is according to the rules in
the Tax Act’s chapter 12, the basis for calculation for social insurance
contribution and surtax). The tax rates for personal income is progressive and
varies from 0 – 12.0 % for surtax. This follows from the yearly Tax Resolution
stating tax rates for the income year 2007. The rate for social insurance
contribution is 7.8 % (uncapped)for employment income, cf the National
Insurance Act section 23-3 and Resolution for assessment of levies etc. for the
National Insurance section 2 . The total marginal tax for personal wages is
therefore 47.8 %. For most wages (between NOK 400,000 and NOK 650,000 at
the rates for 2007) the total marginal tax rate is 44.8 % (surtax equals 9 %).
The employer will also have to pay employer’s contribution to the National
Insurance, cf the National Insurance Act section 23-2. The general rate for
employer’s contributions is 14.1 %, but reduced rates apply to businesses
located in Northern and rural areas.
PARTNERSHIPS
The company’s earnings can either be distributed to partners (see description

in question 8), or paid to the partner as income from employment. According
to the Norwegian Companies Act, a partner which has worked for the
Partnership has a right to be paid for this. This income will be taxed as
personal income. The tax rate for personal income is progressive. The tax rate
for surtax varies from 0 – 12.0 %. The social insurance contribution will be
charged at a higher rate than for ordinary employees (normally 7.8 %) with
33
February 2008
10.7 % (11 % as of 2008), but on the other hand, no employer’s contribution
will be charged, cf the National Insurance Act section 23-2 par 2.
SELF-EMPLOYED INDIVIDUALS
A self-employed individual is not separated from his/her business activity. The

shielding method for self-employed individual will apply to all individuals who
exercise some kind of business activity. The main rules are found in the Tax
Act chapter 12. This method aims to tax as personal income all business
earnings exceeding a risk-free interest on the capital invested.
The tax rates for personal income are progressive and the basis for calculation
of surtax and social insurance contribution. As for partnerships the social
insurance contribution will be charged at a higher rate than for ordinary
employees (normally 7.8 %) with 10.7 % (11 % as of 2008), but on the other
hand, no employer’s contribution will be charged, cf the National Insurance
Act section 23-2 par 2.
iii) Loan granted by the Undertaking to the business owner
The Tax Act contains rules concerning rights to deduct costs in chapter 6. The
general tax treatment of loans is that the lender is taxable for received
interests with a flat tax rate of 28 %, and the paid interests are deductible in
general income with the same amount for the borrower, cf. the Tax Act
section 6-40.
INCLUDE RELEVANT TAX PROVISIONS IN 2002 AND SUBSEQUENT CHANGES

UP TO 2007
Norway Distributed Retained Profit Wages/Sala Loan to business owner
profits ries to
business
owner
Sale of 28% 0% 47,8% 0%
34
February 2008
shares
Sale of 48,16 % 28% 47,8% 0%
business
SUMMARY:
The Norwegian tax system gives an incentive for individual shareholders in
private limited companies or partnerships to retain earnings rather than
distribute them. Such business owner will obtain a tax credit when keeping
the earnings in the company, and a higher annual amount could be
reinvested. Wages are normally taxed at a higher level, especially for higher
income, and are therefore no favourable solution from a tax perspective.
10. Is the combination of wages (paid to the business owner by the

Undertaking), profit distributions and retained earnings a tax planning
issue that is anticipated and addressed by the business owners in view of
minimising the overall tax burden of the business owner and the
Undertaking?
Yes
These issues are the key elements to consider when it comes to tax planning.
The choice of business structure is in many cases driven by tax incentives, and
the main issues to take into consideration will be described in the following.
LIMITED COMPANIES
The previous Norwegian tax system with no tax on distributed earnings

opened for a more extensive tax planning.
35
February 2008
The current maximum marginal rate tax rate of 48.16 % for distributed
earnings (when distributed to the individual business owner) for both limited
companies and partnerships are quite similar to the marginal tax rate for
personal income. This means that there are not the same incentives as earlier
to pay out a low salary and then distribute the earnings as dividend.
The current Norwegian tax system has elements which function as incentives
to retain earnings in the company, rather than to distribute them. By
retaining earnings, the individual business owner will obtain a tax credit
which means that a higher annual amount could be reinvested. This means
that the business owner has the same incentive as earlier to pay out as low
salary as possible, but now to retain the earnings in the company rather than
distributing them. That is, naturally if the business owner can afford to keep
earnings in the Undertaking rather then distributing them to meet his need for
private consumption.
There at two very important questions under evaluation by Norwegian Tax

Authorities in connection with salaries to the individual business owner contra
retained earnings:
1. Must a business owner pay out any salary (or can he/she keep all
earnings in the Undertaking)?
2. If the answer to the first question is yes, what will then be the
right level of salaries paid to the business owner?
The answer to the first question has been ruled over in the Norwegian
Supreme Court in the Dillerud-case on 7 December 2006 (case no: HR-2006-
02054-A). According to this ruling, an individual business owner is obliged to
take out a salary from the Undertaking. The legal foundation for this
standpoint is a non-statutory substance over form rule in the Norwegian tax
jurisdiction, under which a transaction may be disregarded for tax purposes if
36
February 2008
(i) the transaction has no, or only minor, consequences other than the
reduction of tax and (ii) the result of respecting the transaction would be
contrary to the basic policy of the tax provision in question. The ruling
concludes that an individual business owner must be paid a market based
salary for work done on behalf on the Undertaking. This will apply for both
limited companies and partnerships. It is to be said, that the ruling has been
criticised by several legal experts. These issues will continue to be debated
and the rules connected to these issues are expected to be further developed
in the time to come.
PARTNERSHIPS
The earnings will be taxed as general income at a flat tax rate of 28 %.
According to the Norwegian Companies Act section 2-26, a partner which has
done work for the Partnership has a right to be paid for this. This means that
a partner could have the option to choose between distributed earnings and
income from self-employment. The current tax system gives an incentive to
pay out the company’s earnings as income from self-employment rather than
distributed earnings, as distribution does not qualify for earning pension
points for accruing rights to additional pension, cf the Tax Act section 12-2
litra f and the National Insurance Act section 3-13 and 3-15. Only income up
to 12 G ( as of May 2007: NOK 1,048,080) are included in the basis for pension
points.
Distribution of earnings will be taxed at a flat rate of 28 % when distributed

(i.e a combined marginal tax rate of 48.16%), while income from self-
employment will be taxed with up to 51 % for amounts above NOK 682,500 at
the rates for 2008 (28 % ordinary tax + 12 % surtax + 11 % social security levy)
(For lower amounts not charged with surtax the difference will be even
larger.
37
February 2008
The question is if the partners freely can use the partnership’s earnings as
they want. The answer to this question is no. The main rule must be that each
partner is paid a market based salary for the work that is carried out on
behalf of the partnership.
11. In respect to the previous question, is the business owner more interested
in minimising his/her tax burden and then the Undertaking’s or both
equally?
If the business owner has a 100 % majority in the Undertaking, the tax burden
of respectively the company and the business owner is two sides of the same
issue. Business owners will most likely try to adjust to the tax system is such a
manner that the total tax burden is minimised.
In Undertakings with more than one owner, the outcome of tax consideration
could vary from the ones in Undertakings with a sole business owner. The
owners could have different point of views on how the Undertakings earnings
should be disposed, both from a tax perspective as well as from a general
business perspective. It is therefore impossible to give any definite answer to
this question.
Both partnerships and self employed individuals have the possibility to

transform their Undertaking into a limited company without tax consequences
– tax-free transformation. The rules are regulated in section 11-20 et seq., in
the Tax Act. Many business owners have adjusted to the new tax regime, and
transformed their Undertakings into limited companies. This would have
important tax consequences since the business owner then can decide to
retain parts of the Undertaking’s earnings instead of being taxed with a high
tax rate as personal income.
38
February 2008
12. Are there instances in which minimising the tax burden of the business
owner would mean dramatically increasing the tax burden of the
Undertaking?
No
13. For corporate income tax or capital gains tax purpose, are there any
incentives/disincentives to retain earnings rather than distribute them or
pay wages?
Yes
The Norwegian tax system has clearly incentives to retain earnings in the
Undertaking rather than distributing them.
This is especially noticeable for Undertakings buying and selling securities.

Since limited companies are not taxable for neither received earnings or for
capital gains the tax system has built in an important incentive when it comes
to the type of business entity to choose. A limited company would be the
preferred company structure in most such cases. The Norwegian tax reform of
2004-2006 has stimulated many individual investors to establish investment
companies.
13.1. Are there any limitations or ceilings for these incentives?
A business owner can not keep an unlimited amount of earnings in the

company. Especially the relationship between salaries and retained
earnings are important.
• Must a business owner pay out any salary (or can he/she
keep all earnings in the Undertaking)?
• If the answer to the first question is yes, what will then be
39
February 2008
the right level of salaries paid to the business owner?
The answer to the first question has been ruled over in the Norwegian
Supreme Court in the Dillerud-case on 7 December 2006 (case no: HR-
2006-02054-A). According to this ruling, an individual business owner is
obliged to take out a market salary from the Undertaking in accordance
with the arms-length principle. The legal foundation for this standpoint
is a non-statutory substance over form rule in the Norwegian tax
jurisdiction, under which a transaction may be disregarded for tax
purposes if (i) the transaction has no, or only minor, consequences other
than the reduction of tax and (ii) the result of respecting the
transaction would be contrary to the basic policy of the tax provision in
question.. The ruling concludes that an individual business owner must
be paid a market based salary for work done on behalf on the
Undertaking. This will apply for both limited companies and
partnerships. It is to be said, that the ruling has been criticised by
several legal experts. These issues will continue to be debated and the
rules connected to these issues are expected to be further developed in
the time to come.
13.2. Is there a risk that these incentives can be used more than one time
by the business owners by splitting up the business into different
legal entities?
No
14. What is the tax treatment of declared loans granted by the Undertaking to
the business owner?
According to section 6-40 in the Tax Act, the general tax treatment of loans is
that the lender is taxable for received interests with a flat tax rate of 28 %,
40
February 2008
and the paid interests are deductible in general income with the same amount
for the borrower.
The tax authorities will evaluate if the loan granted from the Undertaking to
the business owner is in reality a loan or in fact a form of hidden distribution
of earnings or income from employment (which should have been classified as
salaries). The tax authorities will examine different elements in the
agreement between the Undertaking and the business owner. Important
elements are for example:
a) Will the loan be paid off?

b) Does a written agreement exist between the Undertaking and the
business owner?
c) Has the borrower been granted any security for the loan?
d) Are interests accrued and paid for the loan?
The outcome could be that the tax authorities find that the loan should be
reclassified based on the non-statutory substance over form doctrine. The
consequences are as follows:
1) A loan which is granted to a business owner (shareholder) who

works in the Undertaking, will be treated as employment income
employment, and taxed with a maximum marginal rate of 47.8 %.
The Undertaking will also be charged with an employer’s
contribution of 14.1 %.
2) A loan which is granted to a business owner (shareholder) who

does not work in the Undertaking will be treated as distributed
earnings with a maximum tax rate of 28 %.
As a main rule a business owner must be very careful when borrowing money
from the Undertaking. If not all requirements for a real loan is fulfilled the
41
February 2008
tax authorities will reclassify the loan as either income for employment or
distributed earnings.
14.1 Is there a minimum interest rate to be charged for tax purposes?
As a general rule there is no minimum interest rate, but a lower

interest rate than the one in the market is an indication that the loan
is not real, and will most likely lead to reclassification. A loan at
favourable conditions between the business owner and the Undertaking
would mean transferring values from the Undertaking to the business
owner. The reclassification will in such cases be based on a substance
over form evaluation, pursuant to the arms-length principle in the Tax
Act section 13-1 or the burden of proof provision in the Tax Assessment
Act section 8-1. The main rule is therefore that a loan from the
Undertaking to the business owner must be based on commercial terms
at a market interest rate.
If a loan is granted from the Undertaking to a shareholder who is also

an employee, rules concerning favourable loans to employees will
apply, cf the Tax Act section 5-12 (4). It is a condition that the loan is
granted the person as an employee and not as a shareholder. The
authorities will each year decide a fixed interest rate for every two
month period that will be charged for tax purposes on loans with an
agreed lower interest rate.
For 2006 these interest rates were:

Interest rate for January and February 2006 2.50 %
Interest rate for March and April 2006 2.75 %
Interest rate for May and June 2006 2.75 %
Interest rate for July and August 2006 2.75 %
Interest rate for September and October 2006 3.25 %
Interest rate for November and December 2006 3.50 %
42
February 2008
14.2 How is the interest rate treated for tax purposes for the
Undertaking?
The general tax treatment of loans is that the lender is taxable for
received interests with a flat tax rate of 28 %. The use of set interest
rates as described in question 28.1 will only have tax consequences for
the business owner and not for the Undertaking.
14.3 How is the interest rate treated for tax purposes for the business
owner?
As a general rule there is no minimum interest rate, but a lower

interest rate than the one in the market is an indication that the loan
is not real, and will most likely lead to reclassification. A loan at
favourable conditions between the business owner and the Undertaking
would mean transferring values from the Undertaking to the business
owner. The reclassification will in such cases be based on a substance
over form evaluation, pursuant to the arms-length principle in the Tax
Act section 13-1 or the burden of proof provision in the Tax Assessment
Act section 8-1. The main rule is therefore that a loan from the
Undertaking to the business owner must be based on commercial terms
at a market interest rate.
If a loan is granted from the Undertaking to a shareholder who is also

an employee, rules concerning favourable loans to employees will
apply, cf the Tax Act section 5-12 (4).. It is a condition that the loan is
granted the person as an employee and not as a shareholder. The
authorities will each year decide a fixed interest rate for every two
month period that will be charged for tax purposes on loans with an
43
February 2008
agreed lower interest rate.
For 2006 these interest rates were:

Interest rate for January and February 2006 2.50 %
Interest rate for March and April 2006 2.75 %
Interest rate for May and June 2006 2.75 %
Interest rate for July and August 2006 2.75 %
Interest rate for September and October 2006 3.25 %
Interest rate for November and December 2006 3.50 %
44
February 2008
14.4 What are the combined tax effects of such a loan compared to a
distribution of earnings equivalent in amount?
INDIVIDUAL BUSINESS OWNER
28 % taxable
income and 28 % tax on
deduction on distributed earnings
interest rate of 5 %
LOAN TO BUSINESS OWNER DISTRIBUTED EARNINGS

Business Total Business
Undertaking owner tax Undertaking owner Total tax
1 400 -1 400 0 0 28 000 28 000
CORPORATE BUSINESS OWNER (i.e. limited liability companies and

similar entities)
28 % taxable
income and No tax on
deduction on distributed earnings
interest rate of 5 %
LOAN TO BUSINESS OWNER DISTRIBUTED EARNINGS

Business Total Business
Undertaking owner tax Undertaking owner Total tax
1 400 -1 400 0 0 0 0
45
February 2008
15. Are there any other taxes (e.g. net worth tax) which are imposed or based
on the net equity of the Undertaking?
For limited companies there are no other taxes imposed on the net equity of
the Undertaking.
Partnerships are not separate tax entities, and the value of the net equity of
the Undertaking divided between the partners according to the owner’s share
put down in the partnership agreement and might lead to wealth tax, cf the
Tax Act section 4-40. Rules concerning net wealth tax are found in the Tax
Act’s chapter 4.
16. Are there any other tax incentives for either the retention of earnings or
their distribution of profits?
When it comes to wealth tax there is also an incentive to retain earnings in the
Undertaking. This will, however, only apply for limited companies.
Partnerships are not separate tax entities and the partnerships wealth will be
taxed at the partner’s hand, cf the Tax Act section 4-40. For wealth tax
purposes in 2007, shares in limited companies established during the income
year are valued to 85 % of the Undertakings net wealth, cf. section 4-13. This
means a 15 % reduction in the net wealth base compared to distributed money
for the business owner. As of 2008, shares are now valued at 100 %
46
February 2008
PART 3 – TAX ASPECTS OF RETAINED EARNINGS FINANCING VERSUS DEBT
FINANCING
17. In dept financing, what is the tax treatment of interest expenses paid or
accrued by the Undertaking?
The general tax treatment of debpt is that the lender is taxable for received
interests with a flat tax rate of 28 %, cf the Tax Act section 5-20, and the paid
interests are deductible in general income with the same amount for the
borrower, cf the Tax Act section 6-40.
Loans from private persons to an Undertaking are however treated somewhat

different than loans between two Undertakings.
LIMITED COMPANIES AND PARTNERSHIPS

When tax on retained earnings when this was distributed, was introduced in
2006, the legislator saw the immediate danger of a tax system that had
incentives for distribution of earnings to shareholders through loans rather than
through distribution of retained earnings. Interests are only taxable as capital
income with a flat tax rate of 28 % and the same amount will be deductible for
the Undertaking. The legislator therefore levied an additional tax on interest
paid from the company to individual shareholders or partners. The rules are
found in section 5-22 in the Tax Act.
The private lender will first have to pay the general 28 % tax on capital income
and then another 28 % on 72 % of the received interest. The reason for this
deduction of 28 % is symmetry considerations towards tax on retained earnings.
This means that interests received from a limited company or a partnership are
taxed with a total of 48.16 % for amounts exceeding a risk-free return, which
are the same as for distributed earnings.
47
February 2008
An overview of the bi-monthly risk-free interest rate is encloses below:
Shielding interest rate for January and February 2006 1.7 %

Shielding interest rate for March and April 2006 1.7 %
Shielding interest rate for May and June 2006 1.7 %
Shielding interest rate for July and August 2006 2.1 %
Shielding interest rate for September and October 2006 2.1 %
Shielding interest rate for November and December 2006 2.4 %
These rules apply for all private persons resident in Norway, who lend money
to limited companies and partnerships, and are not limited to shareholders
and partners only. Exceptions apply, however, to debentures and bank
deposits. The legislator has imposed these strict conditions due to the risk of
tax evasion
The practical solutions are very complicated, and Undertakings must each
calendar month report to the tax authorities and give information about loans
and interest rates. This means that calculations will be made every month.
The procedure is so complicated that it has lead to an unintended effect.
Many business owners are now resistant to lending money to Undertakings.
17.1 Is there a different tax treatment to deductions on interest paid

when the lender is a resident or a non-resident for tax purposes?
No
17.2 Is there a different tax treatment on long-term debt and interest on

short-term dept?
No
48
February 2008
18. Are there any tax benefits that are actionable based on specific amounts of
equity (e.g. national interest expense based on the increase of own equity
or the total amount of equity)?
No
18.1 What is the exact calculation method used to implement this

incentive and to evaluate the benefits once this incentive is
implemented?
Not Applicable
18.2 Are there any other tax provisions favouring increases in own
equity?
Not Applicable
19. Is debt financing of an enterprise by the business owner himself or his/her

family recognised for tax purposes (ie. If the business owner or his/her
family lends money to the Undertaking are they treated differently than
other lenders for tax purposes)?
LIMITED COMPANIES AND PARTNERSHIPS

When tax on retained earnings when this was distributed, was introduced in
2006, the legislator saw the immediate danger of a tax system that had
incentives for distribution of earnings to shareholders through loans rather
than through distribution of retained earnings. Interests are only taxable as
capital income with a flat tax rate of 28 % and the same amount will be
deductible for the Undertaking. The legislator therefore levied an additional
tax on interest paid from the company to individual shareholders or partners.
The rules are found in section 5-22 in the Tax Act.
The private lender will first have to pay the general 28 % tax on capital
49
February 2008
income and then another 28 % on 72 % of the received interest. The reason for
this deduction of 28 % is symmetry considerations towards tax on retained
earnings. This means that interests received from a limited company or a
partnership are taxed with a total of 48.16 % for amounts exceeding a risk-
free return, which are the same as for distributed earnings.

and partners only. The legislator has imposed these strict conditions due to
the risk of tax evasion.
19.1 If so, are there any incentives for the business owners to debt-
finance their enterprise instead of retained earnings financing or
equity financing?
50
February 2008
No
20. Is there a general discrimination between retained earnings financing and

debt financing from a tax point of view?
YES
There are tax advantages with debt financing. An Undertaking will have the
possibility to deduct 28 % of all interests paid to external lenders. Retained
earnings will have no tax consequences for the Undertaking.
20.1 Is there a general discrimination between retained earnings

financing and equity financing from a tax point of view?
Not for the Undertaking.
20.2 Is there a general discrimination between equity financing and

debt
financing from a tax point of view?
Yes
The general tax treatment of dept is that the lender is taxable for
received interests with a flat tax rate of 28 %, and the paid interests
are deductible in general income with the same amount for the
borrower.
21. Are there any debt to equity ratios limiting the deductibility of interest
expenses?
51
February 2008
Norway has a separate Tax Act for petroleum activity. The tax rules
concerning tax deduction for interest rates are very favourable for offshore
industry and interests are deductible with 78 %. These advantageous rules
could lead to tax evasion and the Petroleum Tax Act section 3, paragraph h,
contains provisions counteracting thin capitalisation. According to these
provisions the debt to equity rate is 80 to 20 (i.e. minimum requirement of 20
% equity).
There is no similar general rule in the rest of the Norwegian tax system. The
legal basis to cut through an arrangement that is undermining the tax system
is the general non-statutory cut through-regulation in the Norwegian tax
jurisdiction. Since there are no general rules concerning the debt to equity
ratios, the tax authorities and the courts must draw the line. This is a
continuous task, and no rulings have yet given any definite general answers to
the question. But the Norwegian tax authorities would most probably not
accept a higher debt to equity rate than what a bank/third party would
accept if it should have financed the business.
In the Supreme Court ruling in the Statoil case on 26 June 2007 (case no: HR-
2007-01145-A), the Court ruled in favour of the taxpayer that an interest free
loan to a foreign subsidiary was in accordance with the arms-lenght principle,
as subsidiary did not have the financial capacity to obtain a loan from any
non-related parties.
21.1 If so, does the limitation apply to loans granted by the business
owner and affiliated persons or does it include loans granted by
third parties?
Yes
The general cut through-regulation only applies to loans from related
52
February 2008
entities (e.g. the business owner or a parent company).
21.2 What are the consequences if the debt to equity rate is not
respected?
According to the Petroleum Tax Act Undertakings with less than 20 %

equity will only be allowed to deduct a proportionate part of the
interests, cf. Petroleum Tax Act section 3, paragraph h.
22 Are there any tax provisions likely to impact the conversion of retained
earnings into share paid in capital (ie. Share buy-back)?
No
An undertaking could decide to reclassify distributable equity to un-

distributable equity. This will have consequences in respect to company law
issues, but will not lead to a more favourable tax position.
A share buy-back will have identical tax consequences as distributed earnings.

The business owner will be taxed according to the Shareholder Model as
described in question 23. Gains are taxable as general income in the year of
realisation, and losses can be deducted from general income in the year of
realisation. The current tax rate for general income is 28 %. Under current tax
rules, gains or loss is calculated per share, as the difference between the
price of realisation and the individual shareholder’s purchase price for the
share.
23. Are there any other taxes that have as their object to affect or impact on
either Undertaking debt financing or retained earnings financing?
53
February 2008
Prior to a change in the ownership in the Undertaking from one generation to
the next generation (generational change), it can be an advantage to increase
the debt financing of the Undertaking. The Undertaking could take up loans to
buy e.g. property which has a very low taxable value (only 20 -30 % of the
market value). This means that the Undertaking will have increased its debt
compared to the booked value of its assets. The basis for calculation of
inheritance tax will therefore be considerably reduced. It will also be an
incentive to transform a partnership to a limited company before a
generational change, due to the fact that the inheritance tax is based on only
30 % of the value of unlisted shares. The rules are found in chapter 12 in the
Tax Act, and in section 11A in The Inheritance Tax Act.
However, transforming a partnership to a limited company and taking up loans

may be subject to a substance over form reclassification, if there are no
commercial reasons for the transaction other than to save inheritance tax. In
the Supreme Court ruling in the Nagell-Erichsen case (case no: HR-2006-
01749-A), the Court established that the substance over form doctrine applies
in such cases.
PART 4 – TAX ASPECTS OF BUSINESS INCOME VERSUS PRIVATE INCOME
24. In respect to individual business owners, what is the general tax treatment
for private (ie: interest on passive investments) income compared to
business income (ie: income generated from your business activity)?
The general tax treatment of passive capital income is a 28 % flat tax. Income
from business activity is taxed according to the tax rules for the business
entity in question:
a) Earnings distributed from a limited company to an individual

business owner will be taxed according to the Shareholder Model:
54
February 2008
Earnings exceeding a risk-free return on the investment (the cost
base of the shares) are taxed as general income (28 % flat tax
rate) when distributed to individual shareholders.
b) Earnings distributed from a partnership will be taxed according

to Shielding Method for Partnerships: Distributed earnings
exceeding a risk-free interest on the capital invested in the
partnership should be taxable. The partners will be subject to 28
% taxation on distribution of earnings.
c) Earnings from a self-employed individual will be taxed according

to the Shielding Method for Self-employed individuals. All
business earnings exceeding a risk-free interest on invested
capital will be taxed as personal income.
In some cases the tax authorities has to draw a line between passive capital
income and business income. If for example an individual rent out 5
apartments or more, the income is classified as business income (and not as
passive capital income), and is taxed according to the Method for Self-
employed individuals. This will of course also mean that costs connected with
the activity are deductible.
The key elements to consider when it comes to the classification of the

income as capital income or business income, is the extent of the activity.
The evaluation must be based on a comparison between how much the
returned capital that is traceable to the activity and how much that could be
traced to the capital value.
Norway INCLUDE RELEVANT TAX

PROVISIONS IN 2002 AND
SUBSEQUENT CHANGES UP
TO 2007
Norway Private Business
Investment Income
55
February 2008
Income
See text above for details
…
24.1 Are there different allowances or special treatments for private

investment income and business income?
No
25. Is there a different tax treatment for interest income received in a private
investors capacity (ie: business owner investment return in another
Undertaking) and interest income earned through business activity (ie:
business owner investment return from the Undertaking)?
Yes
The general tax treatment of interest income is that the lender is taxable for
received interests with a flat tax rate of 28 %, and the paid interests are
deductible in general income with the same amount for the borrower.
If a private investor lends money to a limited company or a partnership an
additional tax is levied. Another 28 % on 72 % of the received interest will be
charged for tax purposes, cf. section 5-22 in the Tax Act. This means that
interests received from a limited company or a partnership are taxed with a
total of 48.16 % for amounts exceeding a risk-free return and the same as for
distributed earnings.

56
February 2008
and partners only. Exceptions apply, however, to debentures and bank
deposits. The legislator has imposed these strict conditions due to the risk of
tax evasion.
26. Does the tax system encourage business owners to invest in private assets,
which are subsequently rented or leased to their enterprise?
No
There are some obvious dangers with renting or leasing assets from an
individual business owner to their enterprise. The tax authorities will in many
cases cut through the arrangement and claim that the rent or lease
agreement is actually a form of hidden salary. The consequence might be that
that the income is reclassified as personal income and taxed at considerably
higher tax rates.
Factors of importance in the evaluation of rent or lease agreements are e.g.

as follows:
57
February 2008
• Does a written contract exist?
• Does the business entity have an exclusive beneficial right to
the asset in question?
• Is the agreed rent set according to market prices?
The evaluation will be made on an individual and concrete basis and none of
the listed factors will alone be the basis for a conclusion. The rules are
enforced strictly by Norwegian Tax Authorities.
27. By opposition to question 26, does the tax system encourage that assets be
acquired by the Undertaking and rented or leased to their enterprises?
No
There are some obvious dangers with renting or leasing assets from an
individual business owner to their enterprise. The tax authorities will in many
cases cut through the arrangement and claim that the rent or lease agreement
is actually a form of hidden salary. The consequence might be that that the
income is reclassified as personal income and taxed at considerably higher tax
rates.
Factors of importance in the evaluation of rent or lease agreements are e.g. as

follows:
• Does a written contract exist?

• Does the business entity have an exclusive beneficial right to
the asset in question?
• Is the agreed rent set according to market prices?
58
February 2008
The evaluation will be made on an individual and concrete basis and none of
the listed factors will alone be the basis for a conclusion. The rules are
enforced strictly.
28. Are capital gains from private assets taxed in the same way as capital gains
realised within the context of a business activity?
As a general rule capital gains on private assets are taxed as capital income
with a flat tax rate of 28 %. Capital gains are as a main rule calculated as the
difference between the sales price and the purchase price.
Capital gains from the realisation of shares are taxed according to the
Shareholder Model. See a closer explanation of taxation of shares in limited
companies and partnerships in question 23.
According to Norwegian Tax Act many private assets are not taxed upon
realisation. One of the most important exceptions is realisation of private
property. As long as a housing property or a vacation property has been used
privately according to specific rules, no tax is levied upon realisation. The rules
concerning taxation of private property are found in section 9-3 in the Tax Act.
Another important exception is realisation of household effects and other
movables (including cars) that have been used in the owners house or
household, cf the Tax Ac section 9-3 (a) litra a.
Realisation of assets within the context of business activity will depend on the
type of business entity:
• Capital gains achieved in a limited company and partnerships

will be taxed as company income tax with a flat tax rate of 28
%. Undertakings will in many cases be granted a tax credit
when selling assets with capital gains. Gains from business
59
February 2008
assets/equipment can be transferred to a gains and losses
account and depreciated entered as income annually with a
minimum of 20 % of the balance each year, cf the Tax Act
section 14-45 (5). If the balance on the gains and losses
account is negative, at least 20 % of the balance has to be
deducted.
• Norwegian Corporate Shareholders (i.e. limited liability

companies and similar entities) are not subject to tax on
capital gains derived from realisation of shares in companies’
resident within the EEA, while losses suffered from such
realisation are not tax deductible.
• Capital gains for self-employed individuals will in most cases be

taxed as personal income. However, gains from the realisation
of depreciated assets can be transferred to a gains and loss
account, cf the Tax Act section 14-44
28.1 If capital gains from private assets are taxed lower, does this
represent an important incentive for the business (owners) not to
invest in their own Undertaking?
No
In general there are no incentives to invest in private assets rather

than in the Undertaking. If the extent of the private investments is
above certain levels the individual runs a risk that the capital income
might be reclassified and taxed as personal income. See a closer
explanation if question 39.
When it comes to tax planning, the key element is to adapt to the tax
60
February 2008
rules in a way that is totally favourable. Some private investors
therefore choose to keep a private portfolio of for instance property. A
married couple can for example own and rent out up to eight
apartments and the income is still considered to be passive capital
income (and not income from business activity). The tax system seems
to contain incentives to hold a mix of private passive income and
income from business activity through some kind of business entity.
29. Are interest expenses incurred on private debts deductible for tax
purposes?
Yes
According to Norwegian Tax Act section 6-40, all interest expenses are
deductible for tax purposes. Even interests from credit cards etc. will be
deductible. Interests are only deductible in general income and this means a
tax relief with 28 % of interest expenses.
30. Is there a tax advantage for the Undertaking in transferring debts from the
business owner to the Undertaking?
In general it would be more favourable to transfer debt to the Undertaking

from the business owner. Interests are in general deductible for tax purposes.
This will apply for both the Undertaking and the business owner, but by
transferring debts from the business owner the Undertaking’s earnings is
reduced. This will again lead to a lower taxable amount when distributing the
earnings to the business owner.
On the other hand, debt can not be freely transferred between the business
owner and the Undertaking. Both general company law and Tax Act will impose
restrictions on the possibility to transfer dept from the business owner to the
61
February 2008
Undertaking.
31. Is there a tax advantage for the business owner in transferring debts from
the business owner to the Undertaking?
In general it would be more favourable to transfer debt to the Undertaking

from the business owner. Interests are in general deductible for tax purposes.
This will apply for both the Undertaking and the business owner, but by
transferring debts from the business owner the Undertaking’s earnings is
reduced. This will again lead to a lower taxable amount when distributing the
earnings to the business owner.
On the other hand, debt can not be freely transferred between the business
owner and the Undertaking. Both general company law and tax law will impose
restrictions on the possibility to transfer dept from the business owner to the
Undertaking.
32. Are there other taxes such as inheritance tax which have an important
impact to own equity and retention of earnings?
The level of inheritance tax is relatively high in Norway. Inheritance tax will be
levied on all inheritance, also inheritance to close relatives. The rates for
inheritance tax are progressive and are higher for more distant relatives.
For inheritance from parents to children the level of inheritance tax is as

follows:
NOK 0 - 250 000 0%

NOK 250 000 -550 000 8 %
NOK 550 000 -> 20 %
62
February 2008
For more distant relatives the inheritance tax is even higher:
NOK 0 - 250 000 0%

NOK 250 000 -550 000 10 %
NOK 550 000 -> 30 %
The basis for calculation of inheritance tax is normally based on the market
price for the inherited assets, cf. section 11 in the Inherance Tax Act. There is
an important exception from the main rules when it comes to unlisted shares in
limited companies. Unlisted shares are only valued to 30 % of the value of the
company, cf. section 11A.
Prior to a generational change in a limited company, it would therefore be an

advantage to retain earnings in the Undertaking rather than distributing them.
Prior to a change in the ownership in the Undertaking from one generation to

the next generation (generational change), it can be an advantage to increase
the debt financing of the Undertaking. The Undertaking could take up loans to
buy e.g. property which has a very low taxable value (only 20 -30 % of the
market value). This means that the Undertaking will have increased its debt
compared to the booked value of its assets. The basis for calculation of
inheritance tax will therefore be considerably reduced. It will also be an
incentive to transform a partnership to a limited company before a
generational change, due to the fact that the inheritance tax is based on only
30 % of the value of unlisted shares, cf. section 11A.
However, taking up loans may be subject to a substance over form

reclassification, if there are no commercial reasons for the transaction other
than to save inheritance tax. In the Supreme Court ruling in the Nagell-
Erichsen case (case no: HR-2006-01749-A), the Court established that the
substance over form doctrine applies in such cases.
63
February 2008
64
February 2008

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DEMOLIN, BRULARD, BARTHELEMY COMMISSION EUROPEENNE

Study on Effects of Tax Systems on the Retention

Submitted by Rune JALVING

February 15, 2008

Main legislation regarding taxation:

The Parliament (the Norwegian Storting) each year passes a resolution

1.1. Corporate Income

Depreciation category Maximum tax

Loss carry forwards

The principles for depreciation as well as rules concerning timing are

In addition reserves for obsolete inventory, depreciation trade

The main difference is timing difference as described above:

In addition reserves for obsolete inventory, depreciation trade

1.2.1. What are the general principles of income taxation of business

The Norwegian tax system is been based on a two-tier structure, income

1.2.2. Is there a different tax treatment for income from different

No, except for wages/pensions which are taxed at a higher rate.

A brief summary of relevant/applicable tax provisions is given hereunder. No

Norway RELEVANT TAX PROVISIONS AND SUBSEQUENT CHANGES

1.3.1. Is there a different tax treatment between distributions of

CAPITAL GAINS FROM SALE OF SHARES IN LIMITED COMPANIES

The tax base of each share is based on the individual shareholder’s

If an individual shareholder disposes of shares acquired at different

CAPITAL GAINS FROM SALE OF BUSINESS SHARES

The three main business entities are:

Limited partnerships do only exist to a very limited extent.

2.1. Are partnerships treated transparent for tax purposes?

2.2. Can partnerships opt for corporate income tax?

2.4. Is there a difference in this respect between general and limited

2.5. Can corporations opt to be treated tax transparent?

Table 3 INCLUDE RELEVANT TAX PROVISIONS IN 2002 AND

4. Are there any special tax incentives, such as (re-)investment reserves or

4.2. Are there any compulsory measures in relation to the retention of

Yes, ref below

DISTRIBUTION OF DIVIDENDS FROM A LIMITED COMPANY

The Norwegian Limited Companies Act contains regulations which work

A limited company’s equity is divided in restricted equity and

a) Dividends can only be distributed after a decision by the annual general

b) Dividends can only be distributed if the equity is at least 10 % of the

c) Distribution of dividends must be in accordance with prudent and good

DISTRIBUTION OF DIVIDENDS FROM A PARTNERSHIP

In a partnership the partners have a personal and unlimited

However, it is not a common procedure to distribute shares instead of

Private (individual) business owners

Corporate business owners

The impact of the Tax Reform of 2004-2006

Many investors/business owners have adjusted to the new regulation

• Partners and shareholders that own the part/shares individually, retain

8. What is the tax treatment of retained earnings compared to distribution of

A new taxation method was introduced from 2006 to self-employed

8.1. Is there an economic double taxation of distribution of earnings

There is a double taxation of distribution of earnings. The Undertaking

INCLUDE RELEVANT TAX

CAPITAL GAINS FROM SALE OF SHARES IN LIMITED COMPANIES

If an individual shareholder disposes of shares acquired at different times, the

CAPITAL GAINS FROM SALE OF BUSINESS SHARES

ii) Wages salaries paid to the business owner.

The company’s earnings can either be distributed to partners (see description

A self-employed individual is not separated from his/her business activity. The

iii) Loan granted by the Undertaking to the business owner

INCLUDE RELEVANT TAX PROVISIONS IN 2002 AND SUBSEQUENT CHANGES

10. Is the combination of wages (paid to the business owner by the