The Exemption Method in Norwegian Tax Law: Tax Exemption for Companies as Shareholders

The exemption method is an important set of rules in Norwegian tax law that mainly exempts companies from tax liability on dividends and stock gains. This arrangement was introduced to prevent double taxation within the corporate sector but contains several important exceptions and special rules. Here, we review the key elements of the exemption method, both in terms of which entities and incomes are covered.

Basics of the Exemption Method

The exemption method means that dividends and stock gains within the corporate sector are exempt from tax liability, with certain exceptions. This prevents double taxation where the same income is taxed multiple times in an ownership chain. As a natural consequence of the tax exemption, realization losses are also not deductible.

To apply the exemption method correctly, two main questions must be answered:

1. Is the taxpayer included in the exemption method (subject side)?

2. Is the income or loss in question covered (object side)?

Which Companies are Covered by the Exemption Method (Subject Side)

Norwegian Companies and Institutions

The following Norwegian legal entities are generally covered by the exemption method:

• Limited liability companies (aksjeselskaper) and public limited companies (allmennaksjeselskaper)

• Savings banks and mutual insurance companies

• Cooperatives

• Companies listed in section 2-2, first paragraph a to d of the Tax Act

• Securities funds

• Associations and foundations

• Bankruptcy and administration estates where the debtor is among the listed legal persons

A guideline is that distributions from exempt entities should not be able to be transferred to physical persons without creating tax liability for income beyond the shielding. Independent tax subjects that can own shares are typically covered, and liability for the entity's obligations is usually limited to its capital.

Foreign Companies

The exemption method also applies to foreign companies as shareholders. A "foreign" company in this context is a company that is not domiciled in Norway according to section 2-2, first paragraph of the Tax Act, regardless of where the company is registered. This includes companies both within and outside the EEA.

To be covered by the exemption method, the foreign company must "correspond" to a Norwegian subject. In the Supreme Court decision in Rt. 2012 p. 1380 (Statoil Holding), it was established that foreign companies shall be assessed based on how the company form would have been treated tax-wise in Norway, not how it is classified in the relevant other state.

Companies with Participant Taxation

Companies with participant taxation (formerly participant-assessed companies) are not independent tax subjects and are not listed as subjects under the exemption method. Nevertheless, when determining the participants' income, incomes and losses under the exemption method should not be included in the income that is continuously taxed on the participant's hand (except three percent of the dividend).

Which Incomes are Covered by the Exemption Method (Object Side)

Types of Income Covered

The exemption method mainly applies to:

• Legally distributed dividends from limited companies

• Gains and losses from the sale of shares in limited companies

• Distribution from savings banks, mutual insurance companies, cooperatives, and securities funds

• Gains and losses from the realization of shares in participant-assessed companies

• Gains and losses from the realization of financial instruments where the underlying object is an ownership interest in a limited company

Withdrawals are equated with realization within the exemption method, which means that if a limited company transfers a shareholding free of charge to a shareholder, the company will not be taxed for a gain on withdrawal.

Requirement for Legally Distributed Dividends

For the exemption method to apply to dividends, the dividend must be "legally distributed." This primarily refers to the corporate law rules for dividend distribution, both material rules and procedural rules. Distributions in violation of the company law's dividend rules are not covered by the exemption method.

Important Exceptions to the Exemption Method

Incomes from Companies in Low-Tax Countries Outside the EEA

Incomes and realization losses on shares in companies in low-tax countries outside the EEA are fully excluded as an object of the exemption method. The criteria for which states shall be considered low-tax countries follow the CFC rules in the Tax Act.

Requirements for Companies in Low-Tax Countries within the EEA

For incomes from ownership interests in companies domiciled in low-tax countries within the EEA to be covered by the exemption method, it is required that the company is "genuinely established and conducts genuine economic activity in an EEA country."

The purpose of the requirement is to prevent adaptations and tax avoidance. When assessing whether a company is genuinely established, one must examine whether "the company participates in a fixed and permanent manner in the business life of the establishment state through its regular operations."

Portfolio Shares in Companies Outside the EEA

The exemption method does not apply to dividends from and gains/losses on the sale of shares in companies domiciled outside the EEA, where the taxpayer's share of the shares is below ten percent (portfolio shares).

For stock dividends, the taxpayer must have owned "at least 10 percent of the capital" and had "at least 10 percent of the votes" in a continuous "period of two years that includes the earning time" for the exemption method to apply.

For gains, the same requirement for ownership and voting share applies, but the condition of two years of ownership must be met "continuously for the two years preceding the earning time."

Inclusion of Three Percent of Dividends and Distribution

Although the income is covered by the exemption method, three percent of the stock dividend must still be included in general income. This results in an effective tax rate of 0.66 percent for the included incomes.

The three percent rule does not apply to dividends where the receiving limited company owns more than 90 percent of the shares in the subsidiary and has over 90 percent of the votes that can be cast at the General Meeting ("tax group").

For distribution from participant-assessed companies to company participants, three percent of the distribution shall also be considered taxable income. For such distributions, there is no exception based on the participant's ownership share.

In international contexts, dividends and distributions to foreign companies are subject to the three percent rule if the company is taxable to Norway for income through a branch here.