12 May 2020 the Government published its proposed revised national budget. Some changes are related to the COVID-19 outbreak, while others are related to tax policies. Today the Government published its proposed revised national budget. Some changes are related to the COVID-19 outbreak, while others are related to tax policies.
1. Anti-avoidance doctrine: statutory general anti-avoidance rule
2. Employer's National Insurance contributions
3. Value-added tax
4. Electricity tax for cryptocurrency extraction
5. Share options scheme for employees in small startups
6. Tax incentive scheme for startups: tax deductions for investments in startups
7. Initial depreciation scheme for balance group D (temporary)
8. Establishment of a tax balance group for ships in short-sea shipping (temporary)
9. Aquaculture tax
10. Petroleum tax
11. Property tax
THE MINISTRY LIMITS TAX EXEMPTION FOR DEMERGERS AND SALES TO APPLY ONLY TO PROPERTY
From 2020 the former non-statutory general anti-avoidance rule was established by law in section 13-2 of the Taxation Act. When the act was adopted, the Standing Committee on Finance commented in its recommendation to the Storting (the Norwegian parliament) that the practice established by the ConocoPhillips III judgment "will not be changed as a result of the adoption of a new provision in section 13-2 of the Taxation Act". The Ministry of Finance finds reason to comment on this in connection with the revised national budget.
The Ministry asserts that it is unclear whether the Standing Committee on Finance's comments refer to Supreme Court practice (transfer of real property) or to the Norwegian Tax Administration's subsequent practice (transfers of all types of assets, including business activities). The Ministry interprets the recommendation such that the anti-avoidance rule in section 13-2 may be applied in the usual manner when assets other than real property are spun off and then sold exempt from tax under the exemption method. The Ministry makes the following comment:
- If real property is organised in a 'single-purpose' company from the start or 'for a certain period' before being sold, the transaction will stand up to scrutiny. That is less usual for other types of assets, which may then indicate tax planning.
- The anti-avoidance rule is less effective if it can never be applied when assets other than real property are transferred in a similar way.
- A broad delimitation creates the risk of an arrangement that could lead to significant revenue loss.
- On principle it is problematic that a taxpayer can decide whether the sale should be conducted liable to tax or as a tax-exempt sale of shares.
In the ConocoPhillips III judgment, the sale of real property (office buildings) was conducted as a demerger and subsequent sale of shares in order to qualify for tax exemption under the exemption method. If the company had sold the property directly, this would have triggered capital gains tax. The State asserted that the transaction constituted tax avoidance, and for the sole purpose of avoiding tax. The Supreme Court decided that the anti-avoidance doctrine could not be applied in that case, and attached considerable weight to the fact that the transaction was not in conflict with the purpose behind the exemption method (such transactions were also mentioned in the preparatory works for the exemption method).
We consider the Ministry of Finance's view to be in conflict with the Standing Committee on Finance's comment in the preparatory works for the Taxation Act, section 13-2 and the ConocoPhillips judgment, but expect that the Norwegian Tax Administration will follow the Ministry's view and try to apply general anti-avoidance rules to demergers and subsequent sales of shares for assets and activities other than real property.
In the ConocoPhillips III judgment the Supreme Court stated:
"Viewed in isolation, it is of course in conflict with the purpose behind the general capital gain taxation rule if the petroleum company's capital gains are not subject to tax. However, this is of no interest because the purpose of the rules in the exemption model is precisely to exempt such gains from taxation.
Under the exemption model, corporate shareholders are, as mentioned, exempt from taxation on sales of shares. The key reason for introducing this scheme was to prevent share income from being taxed multiple times, known as chain taxation.
I find it difficult to see that the outcome of the transaction in question is in conflict with the purpose behind the exemption model as it is described in the preparatory works. The value created in the property company is taxed as normal to the extent it has materialised in the form of earned income in this company. The tax exemption for capital gains deriving from the sale of shares means that the value created in the property company is transferred to the petroleum company without further taxation. The share income is not shifted away from the corporate sector, and chain taxation is avoided, in accordance with the purpose of the rule."
In other words, the Supreme Court gives considerable weight to the purpose of the exemption method, which is to avoid chain taxation, and that demergers with subsequent sales of shares are not in conflict with this purpose. This is not something that applies specifically to the property sector, and we therefore see no reason to apply the ConocoPhillips III judgment as narrowly as the Ministry of Finance finds, viewed in light of the Standing Committee on Finance's comments in the preparatory works to section 13-2.
We wish that the Norwegian Tax Administration would adopt the same practice as it has done since the ConocoPhillips III judgment in 2014, and hope for further clarification on this point.
The Government has proposed a temporary reduction of four percentage points in the employer's National Insurance contribution for May and June 2020.
To calculate the reduction, it is proposed that employers report the employer's National Insurance contribution at the normal rate and the Norwegian Tax Administration adjust the contribution amount before it falls due for payment. The proposal also covers employer's National Insurance contributions reported in the second payment period, with full rates for sickness benefit or salary compensation, which is refunded by NAV in the third payment period. The proposal covers the employer's National Insurance contribution according to special rates for certain employees deployed from the United States and Canada.
For Nord-Troms and Finnmark (zone IV), where the rate for employers' National Insurance contribution is zero, a salary subsidy equivalent of four percent of the wage base is proposed. The proposal will not apply to amounts less than NOK 1,000. Employers will not need to apply for subsidies. The Norwegian Tax Administration will calculate and pay the subsidy based on A-meldings submitted for the third payment period in 2020. The subsidy will be taxable under the usual rules.
The Government will come with new proposals to defer the deadline for the third payment period from 15 July to 15 October 2020.
EXPANDING VAT EXEMPTION RULES FOR NEWSPAPERS TO INCLUDE IN-DEPTH JOURNALISM
The Government proposes expanding the current VAT exemption rules for newspapers to include both broad and in-depth news stories in print and digital media. This means that VAT exemption rules will no longer apply exclusively to the traditional newspapers but also to several journals, typically under Fagpressen.
To be included in the expanded exemption rules, editorially curated journals are required to publish updates weekly or more frequently. Publications that update less frequently are referred to the limitations in the general provision on journals, which only allows a maximum of two updates between each edition. A further condition for VAT exemption is that the publication's target audience must be the general public. This means that the publication's reach must extend beyond a specific membership; in other words, not just the members of an organisation or association.
As we read the bill, a journal should normally not be limited to members only if its wants to be included in the expanded VAT exemption rules. The strategy and purpose of the journalistic production must be to inform, influence and participate in public debate. The corporate purpose will be a key element in that assessment, according to the amendment bill.
DEFERRED DEADLINE FOR SUBMITTING VAT COMPENSATION CLAIMS
The Government proposes to defer the submission deadline for VAT compensation claims from municipalities and county municipalities.
Municipalities and county municipalities are subject to a particularly short submission deadline under the VAT Compensation Act, and claims for VAT compensation for January and February expire on 10 June 2020. To ease the workload created by measures implemented as a result of the coronavirus outbreak, the Government proposes extending the submission deadline for claims accrued in the first payment period in 2020 from 10 June to 31 August 2020. This means that the submission deadline will coincide with the submission deadline for tax returns for VAT compensation for the third payment period.
The Government proposes repealing the Storting's resolution to introduce full electricity tax for cryptocurrency extraction in large data centres. The proposal has not yet been implemented, pending the necessary clarification with the EFTA Surveillance Authority (ESA) regarding state aid rules.
The justification given for the proposal is, among other things, that technically there are no good reasons for unequal treatment for data centres based on what the energy is used for, and because the consultative bodies were negative towards the proposal.
The share options scheme for employees in small startups was introduced and discussed in connection with the national budget for 2018 and was amended in connection with the national budget for 2020. The scheme is intended to make it easier for small startups to recruit and retain employees.
The revised national budget for 2020 proposes some changes:
- Removal of the condition requiring employees to have taken up their position after 1 January 2018.
- Raise the upper limit on the number of employees in the company from 12 to 25 or fewer employees in the year preceding the allocation of options.
- Raise the maximum threshold for the combined operating revenue and total assets in the company from NOK 16 million to NOK 25 million in the income year preceding the allocation of options.
These changes must be approved by the ESA due to the rules governing state aid in the EEA Agreement before they can enter into force, but the Ministry expects the rules to take effect from and including income year 2020.
The tax incentive scheme for startup companies (Gründerfradraget), which was introduced in the summer of 2019, entitles private investors to deductions in their personal income for investments they or their privately owned companies make in startup companies.
Read more about the Gründerfradraget tax incentive scheme here.
In response to feedback from the ESA, the Ministry proposes some changes/clarifications in the wording of the act (Taxation Act, section 6-53):
- The Ministry proposes changing the wording of the act to explicitly state that the scheme may not be used by listed companies, which was previously assumed to follow from the fact that the scheme applied exclusively to limited companies (not public limited companies) and equivalent companies domiciled in other EEA countries.
- Companies in difficulty may not qualify for this deduction, and it is proposed that this be incorporated into a reference to the definition of companies in difficulty in the EU Block Exemption Directive.
- It is proposed that the act explicitly state that companies which have not met the requirement for repayment of previously illegally received state aid may not receive aid under this scheme.
The Government proposes the introduction of a 10% initial depreciation rate for machinery and other operating assets in balance group D. Initial depreciation entails an increase in the depreciation rate for the first year of the operating asset's useful life from 20% to 30% for this balance group.
This measure is temporary, however, and will only apply to operating assets acquired after the proposal enters into force and for the remainder of 2020. The amendment will take effect from the date stipulated by the Ministry in the regulation, effective for income year 2020. Introduction of the measure may entail state aid under the EEA Agreement, so the amendment will therefore not apply before the measure is approved by the ESA.
The Government will, in connection with the national budget for 2021, consider the possibility of extending the measure to apply in 2021. The proposal is one of the measures aimed at stimulating investment and creating growth in the economy in the wake of the COVID-19 outbreak.
The Storting asked the Government to establish a temporary tax balance group specifically for ships (outside the tonnage tax scheme) in short-sea shipping with an annual depreciation rate of 20% instead the 14%. The Government is pursuing the Storting's request, but does not recommend the proposal because it would complicate the tax system and create high administrative costs relative to the benefit for the business sector. Nor will increasing the depreciation rate for ships that have already been acquired contribute to stimulating activity in the economy.
Nonetheless, the Government proposes that the Ministry of Finance be given statutory authority to introduce a temporary tax balance group for ships in short-sea shipping with a depreciation rate of 20% for newly acquired ships in 2020 that are acquired from an independent party and from the date on which such a proposal takes effect.
This measure may entail state aid under the EEA Agreement and must therefore be approved by the ESA before it can enter into force.
In its revised national budget for 2020 the Government has proposed the introduction of a production tax on salmon, trout and rainbow trout.
The proposal entails a production tax of NOK 0.40 per kilo of salmon, trout and rainbow trout produced.
In 2018 the Government appointed a special committee to consider how the tax system for the aquaculture industry should be designed in such a way that society as a whole receives a share of the supernormal profit that can be generated in the industry. Aquaculture licence permits are issued by the state and confer protected and time-limited right to conduct business activities. The fundamental idea behind the introduction of such a tax system is that the exploitation of natural resources should benefit the society which makes these natural resources available. The committee evaluated both a profit-based resource rent tax and a production tax.
In its revised national budget for 2020, the Government has proposed introducing a production tax for salmon, trout and rainbow trout in the aquaculture industry. The proposed production tax is set at NOK 0.40 per kilo of fish produced. The Government believes that such a production tax, combined with future aquaculture licence auction revenues, will provide an appropriate system for collecting resources for the public good. No profit-based resource rent tax is proposed.
The production tax is proposed to be introduced in the national budget for 2021 and to take effect from 1 January 2021. For the first time, the tax will be payable as tax arrears in 2022.
The revenues from the production tax will be channelled to the Aquaculture Fund and then disbursed according to the prevailing distribution key.
The proposal will mean a slightly higher taxation rate for the industry than today.
Due to the COVID-19 outbreak and low oil price, the Government has proposed temporary changes to the petroleum tax that will accelerate deductions, so that tax payments are deferred and companies' liquidity improved.
The proposal follows on from a separate bill concerning changes to petroleum taxation, which is available here.
Companies involved in the extraction and pipeline transport of petroleum on the Norwegian continental shelf are taxed under the special rules in a separate Petroleum Taxation Act. Costs incurred in acquiring pipeline and production facilities may be depreciated on a straight-line basis over six years. When determining the special tax base, a special deduction – uplift – will be granted, which will amount to 5.2% of the cost price of operating assets.
Specifically, the Government proposes immediate deduction of investments in the special tax base, with an additional uplift of 10%. The proposal applies from 2020 to 2024. It is further proposed that payment may be claimed of the tax value of loss and unused uplift for income years 2020 and 2021. The changes will serve to accelerate investment cost deduction, and the tax value of negative tax bases will be paid out. Liquidity improvements resulting from the proposal will serve to enable companies to go ahead with investments. It is estimated that the proposals as a whole will provide petroleum companies with considerable liquidity in the region of NOK 100 billion for the years 2020 and 2021.
RAISED MINIMUM RATE FOR PROPERTY TAX
The minimum rate for paying property tax will be raised from NOK 50 to NOK 300, so taxpayers who are imposed more than NOK 300 on their property will not be required to pay property tax. This amendment will take effect from the property tax year 2021.
MAXIMUM RATE FOR PROPERTY TAX ON RESIDENTIAL PROPERTIES AND HOLIDAY HOMES
The Government previously announced a reduction in the maximum rate for property tax on residential properties and holiday homes from 0.5% to 0.4%, but has now announced that this change will not take effect until 2022. The maximum rates for property tax therefore remains 0.5% for residential properties and holiday homes and 0.7% on other real estate/commercial property.
Read more about property tax here.
Please contact Marianne, Johan, Synne or Morten, our Partners in RSM Advokatfirma.