Revised National Budget – legislative proposals tax and VAT
The Government’s proposal for a Revised National Budget 2017 was presented today May 11, The main proposal is the introduction of a new tax incentive scheme for start-up companies. Further, it was announced that the Government in connection with the 2018 budget will propose a postponed taxation of employees’ share options in small, newly established companies. Below is an overview of these and other key proposals within tax and VAT. The proposals are most likely voted on in Parliament by June 2017.
The Government has proposed a tax incentive scheme for start-up companies. According to the proposal, long term investments by private persons are deductible in their ordinary taxable income, limited to an amount of NOK 500 000. The tax incentive scheme applies to new investments in private limited companies incorporated less than six years ago (including the year of registration). Further it is required that the company has less than NOK 40 million in both revenues and balance sheet amount and less than 25 employees (full-time equivalent). It is also required that the start-up company has at least one employee, with a minimum of NOK 400 000 of salaries on an annual basis. Not all investors may deduct their investments. An investor or closely related person who holds or previously has held shares of the company does not benefit from the deduction in taxable income. The same limitation applies to previous, current or future employees (during the investment period). A company may not receive more than NOK 1,5 million in deductible investments.
The rules on intra-group contributions are adjusted for corporations that need to pay financial tax. The tax rate for corporations subject to financial tax is 25 %, while the normal tax rate is 24 %. This has made it favorable to give intra-group contributions from a financial corporation to another corporation in the same group. In accordance with the new rules, this is no longer favorable. If an intra-group contribution is given, the financial tax element will be taxed in the financial tax corporation, while the rest will be taxed in the other corporation. Also, the new rules do not make it a disadvantage to give intra-group contributions to a financial corporation.
The rules regarding corporations that are subject to financial tax are adjusted. A company is exempt from financial tax if 70 % or more of its wage costs related to financial services are related to the kind of financial services which are subject to VAT. Before the adjustment, it was relevant whether 70 % or more of the corporation’s total wage costs were related to financial services which are subject to VAT. If a corporation provided both financial services and other activities, this was less favorable.
There is a proposal on a new pension savings scheme. Each year, a person may save NOK 40 000, and it may be deducted in his or her ordinary taxable income. When the pension is withdrawn, it is taxed as ordinary income, with lower rates than the current pension savings scheme. Further details in the new scheme will be given in a regulation. The new scheme is expected to enter into force within autumn 2017.
Self-employed persons who have their own pension savings scheme may deduct some of their savings in their ordinary taxable income. The deduction is increased from 4 % to 6 % of a calculated income between 1G to 12G (today between NOK 92 576 and NOK 1 110 912).
When it comes to wealth tax, there are a few changes regarding rules on valuation of real estate in companies not listed on a stock exchange, debt and secondary residences.
In connection with the 2018 budget, the government announced that it will propose amendments to the rules of taxation of employees share options in small, newly established companies. According to current rules, employees are taxed for the benefit when the options are exercised and the shares are purchased. The new rules will postpone the taxation to the time of the disposal of the shares. The share option part will still be taxed as salary, and the capital gain part as capital income. The company will benefit from the proposal as the payroll tax is also postponed to the time of disposal of the shares. It is not described what is considered “small, newly, established companies”, whether these rules will apply to the same companies as the tax incentive scheme.
The rate for product excise on fish is reduced to 2,2 %.
The Government has suggested an exemption from the duty to adjust compensated VAT according to the VAT Compensation Act when transferring buildings, constructions or other property in connection with mergers and divisions of municipalities in Norway.
Expenses that independent upper secondary schools have connected to education of adult students without the right to upper secondary education is not comprised by the compensation scheme for municipalities. According to the fiscal budget for 2017 this was considered compensated with increased state contribution. In addition the right to compensation for VAT on expenses related to construction and management of the school’s boarding facilities was introduced. This was applicable regardless of whether the student was legally entitled to boarding school. In the Revised National Budget this suggestion comprises education of students without the right to upper secondary education at independent schools. The increased state contribution is suggested reversed.
Administrative rules for tax and VAT:
Follow-up on the Tax Administration Act:
There are several minor formal changes
The Revised National Budget suggests a change to the transitional rule for penalty tax in provision 16-2 (2). According to the current transitional rule the new Tax Administration Act is only applicable for infringements where the Tax Authority has sent notice of penalty after 1 January 2017. The Government has now suggested that the Tax Authority in cases where the infringement took place before 1 January 2017, but where the case is tried after this point in time, are obliged to apply the mildest penalty tax legislation. The change is given effect immediately.
Proposed amendment to the Norwegian Interest Deduction Limitations
The Ministry of Finance has on May 4 2017 published a discussion paper proposing amendments to the Norwegian interest deduction limitation rules. The proposals are in line with recommendations by the Scheel committee (NOU 2014:13: capital taxation in a global economy) and recommendations from the OECD in BEPS action 4. It should also be mentioned that ESA has raised questions as to whether the current rules are in conflict with rules of the EEA agreement.
The current Norwegian interest limitation rules limit the deductible interest on loan from a related party to 25 per cent of an adjusted taxable income, similar to EBITDA. The taxpayer will not be able to deduct interest payments to the extent the expenses exceed 25 per cent of the mentioned EBITDA. Companies whose net interest costs are below NOK 5 million are exempt. Further, interest on loans from an external party are fully deductible provided a related company has not provided a guarantee or similar.
The purpose of the new rules is to strike profit shifting which derives from loans to external parties. In the proposed new rules a Norwegian company which is part of a group of companies, as defined for accounting purposes, the interest expenses on external debt are also subject to the deduction limitation of 25 per cent of EBITDA. However, there is a combined threshold of NOK 10 million in net interest expenses taking into account all entities subject to taxation in Norway.
According to the proposal there are two escape clauses which allow a company to have full interest deductions. The escape clauses are intended to shelter ordinary debt arrangements:
If the Norwegian company has a debt to equity ratio which is equal to or above the consolidated debt to equity ratio of the group as a whole based on the global consolidated financial statements.
If the group has more than one taxable entity in Norway, the company may have full interest deductions if the combined equity level of all Norwegian entities are similar to or above the group equity level as it follows of the global consolidated financial statements.
The proposals will benefit Norwegian companies with internal debt financing which is lower than the debt financing ratio globally on a group level. On the other hand, the proposals could have adverse effects to Norwegian companies with higher internal and external debt financing than the foreign part of the group.
The rules are proposed to have effect from 1 January 2018. The public consultation period is open until 3 August 2017. We expect a final legislative proposal to be submitted to parliament in the national budget for 2018 which will be presented in early October.