Decision on hybrid capital and the exemption method

The case involved a Norwegian limited liability company that invested in convertibles issued by a Swedish company pursuant to a Co-Investment Agreement. The investor argued that these convertibles should be treated as a derivative with shares as the underlying asset, making any gains exempt from taxation under the exemption method. The Tax Administration on the other side disagreed and argued that the investment should be classified as a bond, which would render the gains taxable upon realisation.

The core question centred around the classification of the investment for tax purposes. The Tax Act only distinguishes between equity and debt instruments. Hybrid instruments, such as convertibles, are not explicitly covered, making the classification subject to a comprehensive assessment. 

In this case, the investment was structured to reflect the value of B-shares in the Swedish company without granting any voting rights to the investor. The investor would receive the equivalent value of B-shares upon the sale or listing of the Swedish company. A key consideration was that the investor was not entitled to a repayment of the principal amount. The Co-Investment agreement included a "bad leaver" clause, meaning that under certain conditions repayment was not guaranteed. The Tax Appeal Board therefore considered that there was no general obligation for the Swedish company to repay the principal amount.

The absence of a guaranteed repayment, combined with the fact that the investor would not receive any interest on the investment and the investment could be used to cover operational losses, led the Tax Appeal Board to classify the instrument as an equity contribution. As a result, the investment was treated as a derivative with shares as the underlying asset, meaning gains were exempt from taxation under the participation exemption method.