Norwegian tax ruling BFU 7/2025 confirms favorable treatment for synthetic share programs

Synthetic shares derive their economic value from underlying shares without providing actual ownership or voting rights. Employees are provided the same economic exposure as direct share ownership, including both gains and losses, whilst existing shareholders retain control of the company.

These instruments can be an effective tool to attract and retain talented employees when properly structured and implemented through investment programs where selected employees are offered the opportunity to purchase synthetic shares. This structure directly links employee compensation to company performance, which can increase engagement and loyalty. The synthetic share structure particularly benefits growth focused companies, by allowing existing owners to retain control while offering employees meaningful economic participation in the company's success.

The advance tax ruling confirms that synthetic shares fall within the scope of the Kruse Smith model, which was established by the Norwegian Supreme Court ruling in Rt. 2000 s. 758. This confirmation is significant because it enables companies to offer employees share-based incentives through the Kruse Smith model without triggering immediate tax consequences.

The Kruse Smith model allows employees to acquire shares in the company by paying only a small portion (typically up to 90% seller credit) of the shares market value upfront in cash, with the company providing seller credit for the remainder. The company can at the time of issue agree that the sellers' credit will be forgiven to the extent that the market value of the shares decreases, thereby limiting employees' potential loss. However, such debt forgiveness is taxed as income at the time of cancellation. Despite this downside protection, the Directorate treats the arrangement as a capital investment rather than an employment benefit, provided that employees bear real economic risk through their cash contribution. This means employees pay no tax when acquiring the shares, and any future gains are taxed as capital income rather than salary.

The advance tax ruling also addresses employment dependency in synthetic share arrangements, particularly regarding "bad leaver" clauses.

A "bad leaver" clause prevents employees from receiving the full financial value of their synthetic shares if they leave the company under circumstances considered unfavourable or detrimental to the employer. The connection between employment at the company and income from the instrument differs from ordinary market-based investments in financial instruments. The Directorate noted that such employment-dependent conditions could suggest the employment relationship is so close that income should be classified as employment income. However, the Directorate ultimately found that decisive factors supported capital income treatment, as employees receive the same consideration as selling shareholders when redeeming the instrument, employees pay market value for the underlying share when purchasing the instrument, and value development links exclusively to the company's economic performance rather than directly to the employment relationship. The Directorate therefore concluded that income upon redemption of the instrument should be classified as capital income for the employees.

The ruling provides valuable guidance for companies considering synthetic share programmes, confirming that properly structured arrangements using the Kruse Smith model can achieve capital gains treatment whilst avoiding underprice taxation issues, even with a "bad leaver" clause. However, each arrangement must be carefully structure and should be reviewed by tax advisors before implementation