Newsletter

Proposed radical change to the rules for Norwegian taxation of unit linked capital insurance

Published: 30 January 2025

On 30 January 2025, the Ministry of Finance proposed changes to the tax rules for unit linked capital insurance. The proposed changes are invasive, and in our view go further than necessary. Specifically, the Ministry of Finance proposes that participation exemption should not apply when companies invest in shares and other equity instruments through an endowment insurance policy. The rule change is strange, not least in light of the fact that the tax rules for unit linked capital insurance were significantly changed as recently as 2019, and that a number of companies have taken out unit linked capital insurance after this date, in good faith that the tax rules for such capital insurance were now established for a long time to come. It is therefore more than unfortunate that the Ministry of Finance also proposes that the rules be changed with retroactive effect from 30 January 2025, so that already earned, but not taxed, gains that were previously covered by the exemption method will now be subject to 22% taxation.

Update as of 8 April 2025: In a recent letter to Finans Norge, the Ministry of Finance states that their proposal will not be put forward as initially proposed. The Ministry now suggests reconsidering both the timing and scope of the changes, aiming instead for more targeted measures to prevent tax avoidance while allowing legitimate corporate use of unit linked capital insurance. We therefore expect an updated consultation letter on this topic.

Unit link capital insurance with investment choice (often referred to as a "securities account"), with a so-called "low insurance element", in practice a 101% payout to the policyholder at the occurrence of the insurance event, has certain similarities with investments through mutual funds, apart from the fact that the policyholder can decide for himself what to invest in when investing through a securities account.

In Norwegian law, since 2019, taxation of securities accounts has taken place in the same way as for investments in mutual funds, i.e. according to what is known as the 80/20 rule. For companies that invest via a securities account, this means that gains and dividends that apply to the calculated equity portion in the securities account will be covered by participation exemption. Following the tax changes in 2019, securities accounts have been particularly attractive to companies that have wanted to invest directly in shares and equity instruments issued by companies outside the EEA (typically US/UK shares), as such companies have then been able to obtain gains from such investments under the exemption method via the capital insurance. The alternative to this has been to invest through a mutual fund (with an investment mandate for the same companies) established within the EEA.

Participation exemption has been an important factor in making fund accounts attractive to companies. However, the proposed changes in the consultation document imply that participation exemption will no longer apply to returns from securities accounts. This can lead to a significant increase in the tax burden for investors who invest via a mutual fund account.

The proposal is particularly intrusive for companies that have already invested through a securities account and that have latent share gains, as the Ministry of Finance has proposed to introduce the new rules with retroactive effect, as of 30 January 2025. As mentioned, fund accounts have been particularly attractive to companies that have wanted to invest directly in US equities, and parts of the US stock market (especially in IT/AI) have risen considerably in recent years. Many companies may therefore have significant latent gains on their securities accounts, and will be correspondingly hard hit by a rule of 22% tax liability that is introduced retroactively. The consultation document is very brief on the proposed amendment, and does not mention the discussion of such cases and the consequences this may have for those affected.

The background for the Ministry of Finance's proposal appears to be that unit linked capital insurance can be "abused" in that assets that are not covered by the exemption method (e.g. real estate) can nevertheless be covered by the exemption method, in whole or in part, when investing in such assets through unit link capital insurance. The reason is that the equity portion covered by participation exemption is calculated on a standard basis based on the ratio between the values of shares and other securities. If you invest 70 in equities, 30 in other securities and 900 in real estate in unit link capital insurance, the equity portion will still be 70%. However, this possibility of abuse could easily have been remedied by changing the calculation of the equity portion based on the ratio between shares and other assets. As long as the consultation document also states that the fiscal consequences of the rule change will be limited, the change by exempting securities accounts entirely from participation exemption appears to be all the more unnecessary and unjustified.

For companies that currently have investments in securities accounts, and want to continue to do so, it is important to look specifically at how this will be done in the future, given that the bill is passed. In our opinion, the use of endowment insurance for companies should be limited to investments outside the exemption method. There will not be a nominal tax saving, but a deferral of taxation – similar to that for equity investments via holding companies.

The consultation deadline for the proposal is set at 30 April 2025. The law firm Schjødt will provide a separate consultation input to the bill, and can assist with consultation input for affected clients.