Information letter on investments in limited partnerships

Norwegian participants in non-Norwegian partnerships (that are treated as transparent for Norwegian tax purposes) are taxable to Norway on their pro rata share of the partnership's net taxable income. The Norwegian investors are jointly responsible for delivery of tax forms (No. "selskapsoppgave" and "deltakeroppave"), covering both the partnership itself and their own pro rata share of the partnership's net taxable income.

As of 2023, Norwegian businesses shall submit their tax returns through the tax authorities' new reporting system, by using an accounting or annual accounts system (end-user system) that supports the submission of tax returns and its various forms. As the system for submitting tax returns is new and partly relies on third party systems, the tax authorities expect that there can be issues with submissions and have therefore granted an automatic extension on filing of the Norwegian tax return to 30 June 2024 for Norwegian investors in foreign partnerships.

The tax authorities furthermore informs that if the non-Norwegian partnership submits a tax return for itself before the Norwegian investor submits such return, the information provided by the non-Norwegian partnership will automatically be included in the tax return for the Norwegian partner. Finally, the tax authorities informs that annual accounts for the non-Norwegian partnership is a compulsory appendix when the tax return for the non-Norwegian partnership is submitted.

A non-Norwegian partnership that is transparent for tax purposes in its state of establishment, does not necessarily qualify as a transparent partnership for Norwegian tax purposes. If the partner(s) with unlimited liability for the obligations of the non-Norwegian partnership (typically the general partner in a limited partnership) holds a de minimis stake in the partnership, the general partner can be disregarded as a partner for Norwegian tax purposes. That will result in the non-Norwegian partnership being treated as an opaque entity for Norwegian tax purposes, typically referred to as a hybrid company.

The distinction between transparent and opaque tax treatment for Norwegian tax purposes affects Norwegian corporate investors' possibility to apply participation exemption for its investment in the non-Norwegian partnership:

• If the partnership is transparent for Norwegian tax purposes, the Norwegian investor is taxable on a running basis for its pro rata share of the non-Norwegian partnership's income, whereby participation exemption may apply on certain of the non-Norwegian partnership's investments.
  
  
• However, if the non-Norwegian partnership is treated as opaque for Norwegian tax purposes, participation exemption will be applicable for a Norwegian corporate investor only if (i) the partnership corresponds to a Norwegian qualifying entity (i.e. that all investors in the non-Norwegian partnership have limited liability, typically being the case where the general partner is disregarded as a partner), and (ii) the partnership is either (a) established within the EU/EEA or (b) established within a jurisdiction outside the EU/EEA which is not classified as a low-tax jurisdiction. For non-Norwegian partnerships that are established within a jurisdiction outside the EU/EEA, which is not classified as a low-tax jurisdiction, there is furthermore a requirement that the non-Norwegian partnership does not receive any income from a low-tax jurisdiction outside the EU/EEA, and the Norwegian investor must meet certain ownership requirements (10% ownership of shares and votes for a period of at least 2 year).

In the information letter, the Norwegian tax authorities recommend taxpayers that have invested in hybrid companies to prepare and submit an attachment to the tax return, further describing the investment in the hybrid company to ensure correct taxation.

The tax authorities inform in the information letter that taxable profits of a non-Norwegian partnership in foreign currency must be converted into NOK for Norwegian tax reporting and calculation purposes, and that the exchange rate at the end of the taxation period shall be applied for the conversion. If the non-Norwegian partnership has a deviating fiscal year, the exchange rate at the end of that deviating fiscal year is to be used.

The tax authorities furthermore inform that currency changes may have an impact on tax-free repayment of paid in capital on a partnership share, and upon realization of a partnership share. When a tax-free repayment of paid-in capital is made, currency fluctuations happening during the period between a decision to repay paid-in capital and the actual time of payment, is taxable/deductible. The same applies in the reverse situation when capital is contributed to the non-Norwegian partnership.

The tax authorities finally inform that if a general partner is considered a related party of the non-Norwegian partnership, all interest costs of the non-Norwegian partnership will be treated as interest paid to related parties. Consequently, the interest costs will be included in the basis for interest limitation. The tax authorities stress that if the principal holds ordinary decision-making authority on behalf of the non-Norwegian partnership, they will be considered related parties. This could result in Norwegian investors losing interest deductions if the applicable threshold values under the interest limitation rule are exceeded.

The tax authorities also finally note the following on this subject:

• If a taxpayer assumes that a general partner is not considered a related party, a detailed explanation of this must be attached with the tax return. Taxpayers should also anticipate follow-up from the tax authorities in such cases.
  
  
  
• Separately reporting interest expenses and interest income in the business specification is important. This will assist the Norwegian Tax Administration in avoiding resource-intensive reconciliation checks.