Victory for the Strawberry Group regarding tax-deductible costs

Strawberry Hotels AS is the holding company of Petter Stordalen's hotel group. In 2015, Strawberry Hotels AS settled a dispute with the estate of Tribe Invest AS. The estate had sued to reclaim values of approximately NOK 1.5 billion. The company paid NOK 80 million in full settlement of all claims, without admitting liability. The board minutes cited three reasons for settling: negative media coverage and reputational risk, relations with business partners, and litigation risk. Two subsidiaries of Strawberry Hotels AS also paid NOK 36 million and NOK 28 million respectively as their share of the cost. The tax authorities denied a deduction in all three companies. They also treated the subsidiaries' payments as taxable dividend income for Strawberry Hotels AS.

The central question in the case was whether Strawberry's payments constituted deductible costs under the Norwegian Tax Act. The state argued that the settlement represented a restitution of unlawfully distributed funds and therefore did not satisfy the condition that the costs need to be incurred (Nw. "oppofrelsesvilkåret").

For the subsidiaries, the state argued that none of the two conditions for tax deductions were met: the costs were not incurred and were not linked to income-generating activities for the subsidiaries (Nw. "tilknytningsvilkåret").

The case was decided two to one. The majority emphasised that a settlement is a practical means of resolving a dispute, not a legal determination of the underlying relationship. Strawberry Hotels AS consistently denied that any unlawful distribution had taken place. It settled to manage reputational risk, preserve business relationships, and avoid litigation costs. The agreement explicitly stated that it admitted no liability. The settled amount was also far below the claimed NOK 1.5 billion. This strongly supported the conclusion that the payment was not a restitution of unlawfully distributed funds.

The majority concluded that the payment was a settlement. It reduced Strawberry's financial position and therefore constituted an incurred cost.

The majority held that prolonged litigation would have generated negative media coverage, a risk heightened by Stordalen's high public profile. A weakened reputation would have reduced hotel guest numbers and revenue. The majority relied on a Deloitte memorandum of 11 March 2016, which estimated a revenue shortfall of at least 0.5%, corresponding to at least NOK 35 million per year. The settlement payment could prevent this loss and was incurred to secure the group's taxable income.

The majority also emphasised that the assessment on whether the costs have been incurred in order to generate or secure taxable income, must be based on the taxpayer's stated purpose, unless the cost serves a disqualifying purpose such as a gift or private expense. Courts should exercise restraint in reviewing commercial judgement.

The attribution question was whether the subsidiaries had a sufficiently independent basis for bearing their share of the cost. The majority found that the settlement related to the group's joint hotel operations. Both subsidiaries had a clear commercial interest in it. Since the subsidiaries' payments covered their own shares of the settlement, no value was transferred to Strawberry Hotels AS. There was therefore no basis for dividend taxation.

The majority established that the tax characterisation of a settlement payment must rest on an assessment of the settlement, not solely on the legal basis the claimant advanced in its statement of claim. Characterisation for tax purposes follows the facts, not the labels.

The majority also highlighted a fairness dimension. A taxpayer that faces an allegation of unlawful conduct and settles to avoid continued litigation should not lose the right to deduct the payment simply because the opposing party framed its claim as one for restitution.

The analysis on whether the costs have incurred in order to generate or secure taxable income, raises a more fundamental question. The majority took a forward‑looking approach based on the probable consequences of continued litigation. The minority took a backward‑looking approach focused on what the payment objectively covered. Both find support in case law. The ruling exposes a genuine methodological disagreement that remains unresolved in Norwegian tax law. An appeal to the Supreme Court by the state is likely, and it would be very interesting to have this question treated by the Supreme Court.