Tax exemption for companies’ income from shares

In the National Budget for 2005 the Government proposes that companies’ income from shares will be exempted from taxation. At the same time, the right of companies to deduct losses on shares will be abolished. The amendments will have effect on share losses incurred and gains derived as of 26 March 2004, and the tax exemption for dividends shall have effect for dividends derived as of 1 January 2004. The Government also proposes measures to prevent undesirable arrangements to avoid taxation and certain provisions in an intermediate phase.

The tax exemption model implies that limited companies are exempted from tax on dividends and on capital gains from the alienation of shares. At the same time, the right to deduct losses on shares will be abolished. The companies will continue to be taxable on their current profits. Combined with the proposal of a model for taxation of individual shareholders (the shareholders model), dividends and gains on shares will be taxed on extraction from the company sector, and only to the extent such income exceeds a risk-free rate of return.

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

The tax exemption model applies to private and public limited companies and other companies of the same standing as limited companies for tax purposes. Furthermore, the tax exemption for companies’ income from shares applies to associations, institutions, estates in bankruptcy, municipals and state-owned companies.

The exemption will, as a main rule, apply equally to domestic and cross border income on shares. The tax exemption model will be compatible with Norway’s obligations under the EEA Agreement.

Under the proposed rules, companies may continue to deduct interest on debt incurred to finance acquisition of shares giving rise to tax exempt income. The tax exemption model, however, implies that companies can no longer claim deduction in respect of other costs attributable to income that will now be tax exempt.

To prevent arrangements to avoid taxation and harmful tax competition the Government proposes that the tax exemption model should not be applicable to investments in foreign countries with low corporate taxation outside the EEA or to portfolio investments outside the EEA. There will be no amendments to the existing withholding tax regime on dividends from Norwegian companies to corporate shareholders outside the EEA.

A rough estimate of the revenue effect indicates that the proposed amendments will give an annual tax relief of five hundred million NOK.

The Government proposes that the tax exemption model shall have effect on share losses incurred and gains derived as of 26 March 2004 (the date on which the White Paper on tax reform was presented). The Government also proposes that the tax exemption for dividends shall have effect for dividends derived as of 1 January 2004. However, there is proposed a certain transitional provision for gains derived and losses incurred within the fiscal year 2004, allowing consolidation of net losses of shares incurred in the period 26 March to 31 December against and including net gains on shares derived in the period 1 January to 25 March.

Due to administrative considerations, the shareholders model is proposed to be introduced from the fiscal year 2006. The Government proposes certain provisions for the fiscal years 2004 and 2005 to avoid that tax free gains and dividends from the company sector can be distributed out as dividends to individual shareholders without taxation.