Taxation of private consumption in companies

The Ministry of Finance proposes the introduction of special rules for taxation of private consumption in companies. In an article in Dagens Næringsliv, the proposed tax is called a "monster tax"[1], and the proposal meets with criticism from several quarters. The proposed rules may, inter alia, affect all family-owned companies engaged in residential and holiday home rental and similar companies owned by a single person, and may, in terms of the wide area of application compared with the high taxation that is proposed, have a disproportionate effect.

The consultation paper from the Ministry of Finance is discussed in more detail on the Government's website, where it can be read in its entirety.[2] In short, the proposal entails introducing a new set of rules for taxation of personal shareholders' private use of assets that are owned, rented, leased or otherwise used by the company.

The special rules shall supplement the current rules on tax on withdrawals and dividend. According to the current rules, the benefit of withdrawal for own use and transfer of assets as a gift, goods or services, shall be regarded as taxable income.[3] These rules on tax on withdrawals mean that if a shareholder uses the company's residential property for private purposes, this shall be regarded as a taxable benefit. The main rule is that such private use must actually have taken place in order for tax on withdrawals to be possible. Furthermore, free transfers of values from the company to the shareholder, such as a shareholder's free or discounted use of the company's residential property, will be regarded as dividends or distributions and thus be subject to taxation on the part of the shareholder.[4] Again, however, such taxation presupposes that a free transfer of assets has actually taken place. A key purpose of these rules is to prevent the shareholder from obtaining favourable and unjustified tax benefits by purchasing assets and services through the company, instead of acquiring the assets and services privately.

In the consultation paper, the Ministry of Finance points out that non-compliance and the possibility for audit by the authorities, present challenges with the current regulations. This is the background for the consultation paper, which according to the Ministry will "counteract private consumption by reducing the possibilities for unfairly favourable taxation and to simplify the assessments of evidence"[5]. In order to achieve these objectives, a standard determination of the benefit to be taxed is proposed, where the standard is set extra high. The special rules are thus intended to function as "stop rules", so that the scope of acquisitions of assets in companies for private consumption is reduced.

The new special rules are proposed to apply to personal taxpayers who directly or indirectly own or control at least 50% of a limited liability company (Norw. AS), partnership with apportioned liability (Norw. ANS) or equivalent Norwegian or foreign companies. Ownership and controlling interests for the taxpayer's close associates must be taken into account. This means that any company owned by one person alone, or is family-owned, will be covered by the special rules.

Furthermore, it is proposed that the special rules shall apply to residential properties, leisure properties, boats, planes and helicopters that are owned, rented, leased or otherwise used by such companies. As regards residential and leisure properties, the rules only apply to such properties that are suited for private use. However, the fact that a property is suited for private use is also sufficient for taxation to be considered.

According to the proposal, a personal taxpayer will be considered to have had the use of a property for all periods where it cannot be documented that the property has been used in income-generating activity, and it is this use that triggers taxation. Whether the property has actually been used privately is irrelevant. Furthermore, if a property covered by the rules has actually been used privately, then it does not matter that the taxpayer has paid market rent for the use. Such payments will only be deducted when calculating the taxable benefit.

According to the proposal, a personal taxpayer can thus be taxed for private use during periods when a rental apartment is vacant, for example from when a tenancy ends and until a new tenant moves in, or when the apartment is temporarily not rented out for reasons of renovation or maintenance. In times of recession where vacancy can be due to difficulties in bringing in new tenants, taxation for presumptive private consumption can be catastrophic for the landlord.

It is understandable that the authorities want simple and effective rules for private consumption, but the proposed rules seem to be unreasonably harsh. In particular, the delimitation of use, the fact that the taxpayer shall be considered to have had use of the property if the property cannot be documented as used for income-generating activity, appears to be problematic. The proposal does not take into account that the landlord in periods may have legitimate and reasonable intentions not to use the property for income-generating activity. Furthermore, the proposal does not take into account that such breaks in use in income-generating activity may be due to circumstances beyond the landlord's control. In order for the regulations not to work as a stop rule for privately and family-owned housing rental companies as such, exemptions or clarifications must be in place that prevent such cases from being included in the regulations and trigger strict taxation.

The consultation deadline is 1 August 2022, and it remains to be seen whether the proposal will be adopted and how the final rules will be formulated.

^{[1] Article in the newspaper Dagens Næringsliv by Harald F. Strandenæs and Torstein Feldborg from Advokatfirmaet Strandenæs, published 16 April 2022, https://www.dn.no/innlegg/jus/skatt/selskapsskatten/innlegg-denne-skatten-ma-fa-navnet-monsterskatt/2-1-1218938
[2] https://www.regjeringen.no/no/dokumenter/horing-forslag-til-sarregler-om-skattlegging-av-privat-konsum-i-selskap/id2911994/
[3] See the Norwegian Taxation Act, Section 5-2
[4] See the Norwegian Taxation Act, Section 10-11 and 10-42
[5] The consultation paper, p. 13}