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The tax committee's report for a comprehensive tax reform in Norway

Published:

Closeup of glass building

On 19 December 2022, the Norwegian Ministry of Finance published the tax committee's report for comprehensive tax reform in Norway. The report aims to simplify and modernize the tax system, with a focus on increasing competitiveness, promoting sustainable economic growth, and in certain contexts reduce the burden on taxpayers. The proposed reforms include changes to the personal income tax, corporate tax, value-added tax (VAT), resource rent taxes, and other taxes and duties. The report has been submitted for consultation, with a deadline for responses on 15 April 2023.

Employment and Social Security

Deduction in salary and business income


The committee proposes to introduce a new deduction in salary and business income (Nw: arbeidsfradrag). The deduction is proposed set to a maximum of NOK 55,000 for income up to NOK 300,000 and then reduced gradually by 5% for income up to NOK 1,400,000. For salary and business income from labor that exceeds NOK 1,400,000, there will be no deductions. Nor will the deduction apply to income from pensions or social security.


Reduced social security tax


The social security tax (Nw: trygdeavgift) is proposed reduced by 1%.

Corporate tax

The corporate income tax


The committee concluded that the corporate income tax rate of 22% should remain unchanged. The committee noted that any future changes in the corporate income tax rate should be considered in light of international tax developments.


Depreciation rates


The committee proposes to reduce the depreciation rates for the following balance groups:

Balance Group

Current rate

Proposed rate

C (trucks, lorries, buses, etc.)

24%

20%

E (ships, rigs, etc.)

14%

10%

H (buildings and installations, hotels, etc.)

4% (normal rate)

2% (normal rate)

6% (increased rate for livestock buildings in the agriculture industry)

4% (increased rate for livestock buildings in the agriculture industry)

Ownership of shares

Distributions of dividends and realization of shares


The committee proposes to reduce the effective tax rate on the distribution of dividends and realization of shares for non-corporate shareholders to 34% from 37.84% (effective from 1 January 2023).


Tax-free allowance


Non-corporate shareholders are taxed on dividends and profits from the realization of shares that exceeds a tax-free allowance. The tax-free allowance is proposed to increase from the interest on treasury bills with three months' maturity plus 0.5 percentage points after tax, to the interest on treasury bills with ten years maturity after tax. The committee expects that the proposed change will increase the tax-free allowance by 0.4%.


Participation exemption


The participation exemption is a tax provision that as a general rule exempts companies from paying tax on dividends and profits on capital gains, and losses on the realization of shares as a general rule are not deductible. Currently, 3% of dividends are to be taxed at the corporate income tax rate of 22%, giving an effective tax rate of 0.66%. The committee proposes to extend the scope of the 3%-rule to the realization of shares, and to increase the rate to 5%, giving an effective rate of 1.1%.


Repayment of paid-in capital


The committee proposes that the tax position paid-in capital is set to the share's proportionate share of paid-in capital in the company. Whether a distribution should be classified as repayment of paid-in capital should be determined at the company's discretion. Further, the tax exemption for repayment of paid-in capital is proposed limited to the shareholder's cost price on the share. If the distribution is higher than the shareholder's cost price, the part of the distribution that exceeds the cost price is proposed taxed as a dividend.


Liquidation


The committee proposes to change Section 10-37 first paragraph of the Tax Act so that distributions in connection with a liquidation are treated as dividends instead of gains. The proposal is meant to limit international investors (in particular private equity funds) from creating structures where they avoid paying withholding tax on profits that are derived from Norway, as most tax treaties limit the host nation from taxing the foreign investor for the realization of shares.

Ownership of other assets

The committee notes that the taxation of income derived from the ownership of shares and other investments should be taxed at a similar rate to avoid favoring any form of investment. The committee has presented two options, both of which suggest increasing the tax rate for other investments significantly. However, the committee acknowledges that they have not had enough time to assess the different options, hence they have not concluded how an increased tax rate for other investments should be implemented.

Withholding tax on interest and royalties

The committee proposes to increase the scope of the withholding tax on interests and royalties so that they are not limited to payments to low-tax jurisdictions. Further, the committee proposes to increase the scope of withholding taxes within the EEA, on the condition that a method for net taxation is established.

Wealth tax

The committee intends to keep the wealth tax as part of the Norwegian tax system. However, the committee proposes to reduce the tax rate, and partially replaced it with an inheritance tax. Furthermore, the committee wants to amend the wealth tax by expanding the wealth base and removing all valuation discounts so that all assets are valued at 100% of market value. In addition, the committee proposes to lower the tax rates in both stage 1 (from 0.95% to 0.5%) and stage 2 (from 1.1% to 0.85%).

Inheritance tax

The committee proposes to introduce a new inheritance tax. The tax basis for the proposed new inheritance tax will comprise the market value of all inherited assets with a deduction for debts, without any discounts or lower valuation of specific objects. The committee proposes the following rates:


Net value

Tax for closest heir

Tax for other recipients

NOK 0 – NOK 2,000,000

0%

0%

NOK 2,000,000 –
NOK 3,500,000

6%

8%

NOK 3,500,000 kr –

15%

22%

Real Estate

Tax for living in owned property


The committee proposes to introduce a tax on the benefit of living in your own home. The tax rate is proposed to be 1% of the market value of the property.


Tax on the sale of owned property


The committee proposes to change the rules on the tax-free sale of own property. The proposal entails that profits become taxable and losses become deductible for the period in which the owner has not lived in the home during the last five years of ownership.


Tax on long-term rental of owned property


The committee proposes to remove the tax exemption for long-term rental of owned property, where the owner lives in more than 50% of the property.


Tax on short-term rental of owned property


The committee proposes to remove the tax-free allowance of NOK 10,000 for short-term rental.


Tax on the sale of vacation homes


The committee proposes to remove the tax exemption for the sale of vacation homes, thus making any sale of vacation homes taxable.


Stamp duty


The committee proposes to remove the stamp duty of 2.5% for the transfer of title to real estate, provided that the committee's other proposals are implemented. If the other proposals are not implemented, the committee proposes to extend the scope of the stamp duty to apply to all forms of ownership of property (share, cooperative housing, etc.)


Property tax


The committee proposes to remote the tax-free allowance for the property tax.

Resource rent taxation

The committee is generally positive to resource rent taxation for all industries that utilize scarce location-bound resources (e.g. the fishing industry, forestry, and frequency management). Further, the committee supports the introduction of a resource rent tax for the onshore wind industry and the aquaculture industry. However, the committee does not propose any resource rent tax for the offshore wind industry. The majority of the committee proposes a deviation from the government's proposal for resource rent taxation of aquaculture. The majority proposes that the resource rent tax be introduced at a rate of 40%, which is the same as the government, but without an exemption for small business, to secure the effectiveness of the tax.

Value Added Tax (VAT)

The Norwegian VAT system is largely based on the same principles as in the EU, although the EU VAT regulations are not binding on Norway under the EEA Agreement.


As regards VAT on international transactions, the Norwegian VAT system is highly influenced by the OECD work of WP9, both as regards the destination principle and regard mechanism for the effective collection of VAT. Cross-border sales of goods and services are treated in accordance with the destination principle, and imports to Norway are in principle VAT liable - through either border collection or use of the reverse charge mechanism, while exportation is zero-rated. Non-Norwegian entities providing VAT-able supplies in Norway must register for VAT.


VAT is payable on all goods and services unless specifically exempted, i.e. the following services are exempted:


  • Financial services, the VAT exemption for financial services is broad in scope, primarily encompassing the core areas within banking, insurance, and securities trading.
  • Education services, the VAT exemption for education services is broad in scope, i.e. courses or training programs that are primarily undertaken for recreational purposes are within the scope of the exemption.
  • Art and culture services
  • Sport (sporting and physical education services, both non-profit-making-/profit-making bodies)
  • Health and social services
  • Public authority and intra-governmental services
  • Letting of real property, however, voluntary registration (opt-in) for VAT for letting out real estate to VAT-liable businesses as well as counties and local municipalities (qualified tenants).

The VAT-rate structure is:


  • 25% - standard VAT rate
  • 15% - foodstuffs
  • 12% - passenger transport, hotel accommodation services, etc.
  • 0% - books, newspapers (paper and electronic)
  • 0% / 25% - sales and leasing of electric vehicles (EVs) with a purchase price up to NOK 500,000 are subject to VAT zero rate. As of 1 January 2023, 25% VAT on the part of the EV's purchase price exceeds NOK 500,000.

The majority of the committee recommends a single rate (25%) and abolition of (most of) the VAT exemptions. The VAT exemption implies that VAT represents a cost element with regard to goods and service inputs used in the production of exempt services. This is undesirable, as it may influence the structuring of production. The VAT regime may, for example, prevent the outsourcing of services (which are subject to VAT), although such outsourcing might be economically more efficient than for the exempt business to produce the relevant services themselves. Moreover, for dual regime businesses, the exemption also implies that a distinction must be made between inputs acquired for use within and outside such portion of their activities as is subject to VAT. A single VAT rate saves both the administration and the businesses significant costs and is the solution that can ensure tax neutrality and an increased tax income. The committee takes the same position as the VAT committee's report for a comprehensive VAT reform in Norway (NOU 2019:11 "Simplify the VAT a single rate").


VAT is not intended to be paid by businesses, but by the end users in the system (the consumers). The committee recommends to partially compensate households for the increase in the cost of goods and services, through i.e. increased child benefits, family-related benefits, financial social assistance, etc.