The participation exemption – when is a company exempt from tax on dividends and share gains?
The general rule for a Norwegian AS is that gains on qualifying shares are tax-free, losses are not deductible, and a lawfully received dividend attracts 0.66% effective tax because 3% is taken to income. In a tax group with more than 90% ownership even that 0.66% falls away. But the exemption is not a rule that «shares are tax-free in a limited company» – where the company belongs, how large the holding is and what the instrument actually is can all reverse the answer.
Why does the participation exemption exist?
The participation exemption (fritaksmetoden) came in with the tax reform, with effect from 1 January 2004 for dividends and 26 March 2004 for share gains and losses. The purpose is to avoid chain taxation: the same value being taxed again at every level as it moves up a corporate structure.
The general rule for an ordinary Norwegian holding company
Gain on the sale of qualifying shares: normally tax-free. Loss on the same shares: normally not deductible. Lawfully received dividend: normally covered, but 3% of the dividend is as a general rule taken to income. With 22% corporation tax that gives an effective tax of 3% × 22% = 0.66%. The three-per-cent rule applies to dividends, not to share gains.
Wholly owned subsidiaries escape the 0.66% too
Where Holding AS and Operating AS meet the conditions for a tax group, the three-per-cent income recognition falls away. A key requirement is that the parent owns more than 90% of the shares and has a corresponding share of the votes. Exactly 90% is not enough. That is the same threshold as applies to group contributions.
Norwegian shares are the easy part
The difficulties start when the investment goes outside the standard model. The exemption does not apply automatically to all foreign shares, to bonds and ordinary receivables, to every convertible instrument, to companies in low-tax jurisdictions, or to every distribution called a «dividend».
Within the EEA the general rule is favourable
Shares in a company resident in another EEA state can fall within the exemption where the foreign company corresponds to a qualifying Norwegian company type. For companies in a low-tax jurisdiction within the EEA an important addition applies: the company has to be genuinely established and carry on genuine economic activity. What that requirement actually involves is set out in Genuinely established in the EEA – what the substance test means in practice The rules are not symmetrical: a lack of substance can make a gain and a dividend taxable without a loss automatically becoming deductible.
Low-tax jurisdictions outside the EEA fall outside
For companies resident in low-tax jurisdictions outside the EEA, dividends, gains and losses normally fall outside the exemption. Whether somewhere is a «low-tax jurisdiction» is not decided by the nominal corporate rate alone. Effective tax, the tax base and the Directorate of Taxes' regulatory lists all have to be considered. The same test is used in the CFC rules.
Outside the EEA, 10% and two-year rules apply
Where the company is outside the EEA but not in a low-tax jurisdiction, the exemption can still apply. For a gain, the Norwegian corporate shareholder must as a general rule have held at least 10% of the capital and 10% of the votes continuously for the two years up to realisation. For a dividend the two-year period is formulated differently and can partly be satisfied after the dividend has been earned. The loss rule is again more asymmetrical: a loss can still fall within the exemption where the taxpayer or a related party has at any point in the last two years held at least 10% of the capital or the votes.
An American example
If Holding AS owns 2% of a US-listed company, a gain will normally fall outside the exemption and be taxed at 22%. A deductible loss can correspondingly give 22% tax value – provided the investment really does sit outside the exemption. A broad share portfolio in a holding company is therefore not automatically a tax-free investment vehicle.
Not everything that resembles equity is covered
Convertible bonds are a good example. In the REC judgment, HR-2011-2285-A, the Supreme Court did not accept that the instrument could be split into a debt part and a subscription right part so as to bring part of the gain within the exemption. Hybrid dividends can also fall outside: where the distributing company gets a tax deduction for the distribution, the dividend can fall outside the exemption. That prevents the same payment from both giving a deduction in one country and being tax-free income in Norway.
A lawful dividend is a condition
The exemption covers a lawfully distributed dividend. A payment does not become tax-free simply because it is booked or described as a «dividend». The distributable limit, the adequacy requirement and the decision formalities in the Companies Act all have to be in order.
What about costs in the holding company?
Section 6-24 of the Taxation Act can give a deduction for certain costs connected to the ownership activity, but costs directly related to acquiring or realising the shares are as a general rule not deductible. The Telenor and Kverva judgments show that the line depends on the cost's function and its connection to the source of income – not on what the invoice is called.
The short overview
Norwegian and many EEA shares: gain normally tax-free, loss normally not deductible, dividend normally 0.66% effective tax, with a possible group exemption. Low-tax jurisdictions outside the EEA: the exemption normally does not apply. Portfolio investments outside the EEA: often fall outside. Larger direct investments outside the EEA: can be covered where the ownership and time conditions are met. Bonds and ordinary receivables: normally fall outside. The most important question is therefore not whether the company is a holding company, but whether this particular income from this particular investment is covered by section 2-38 of the Taxation Act. Greenleaf can classify the share investments, check whether dividends and gains fall within the exemption, and ensure the tax treatment and reporting are correct.
Read more
This is general guidance, not advice on your specific case. Deadlines, rates and amounts change – always check the current rules, or get in touch with us.
More on holding companies, structure and cross-border
- A holding company – when does it pay off, and when does it not?
- Can I put a holding company above an AS I already own?
- Group contributions – can a profit in one company cover a loss in another?
- Mergers and demergers – when is a reorganisation worth the work?
- A holding company abroad – what do Norwegian tax rules require?
- Effective management – when does a foreign company become taxable in Norway?
- CFC rules (NOKUS) – when are Norwegian owners taxed before the money comes out?
- Genuinely established in the EEA – what does the substance test mean in practice?
- Do you own a foreign company? How to report it correctly
- Exit tax – what happens to your shares when you leave Norway?
- A foreign company setting up in Norway – what has to be in place?
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