New consultation paper from the Ministry of Finance proposes amendments to the provisions of the Income Tax Act concerning where a company is tax resident.
Companies, like individuals, have a residence and an address. The residence is among other things decisive for the tax liability. A company is subject to tax in Norway on its worldwide income if it is a resident of Norway, cf. the Income Tax Act section 2-2. In addition, a company may be subject to tax in another country on income from assets, employees or business in that country. But where is a company resident? What if the company is a resident of two or more countries? And can a company be stateless? A new consultation paper from the Ministry of Finance proposes amendments to the Income Tax Act in order to clarify these matters.1
The country of incorporation, or the country of effective management
Countries apply two different principles when determining where a company is resident for tax purposes. In some countries, it is essential where the company is incorporated and registered, while other countries establishes residency based on the place of effective management. These principles may be applied in various forms, such as which management functions are deemed decisive. Countries may also apply a combination of the two principles.
Norwegian tax law has until now put the main emphasis on the place where management of the company at board level takes place, i.e. where the actual board decisions are made. Foreign companies with extensive operations in Norway are not considered resident in Norway as long as the board meetings and the board decisions are made outside of Norway. Such companies may, as mentioned, be subject to tax in Norway for business activities etc. conducted here. Whether a Norwegian company has moved its residency out of Norway is also based on an assessment of management at board level, but in these cases a broader assessment of the company's ties to Norway has to be made. It has not necessarily been sufficient to hold the board meetings outside of Norway to consider a company as emigrated, if other management functions and business of the company has remained in Norway.
As it is quite easy to document where board meetings are held, the current rules have been relatively simple and predictable, both for the companies and for the tax authorities.
The Ministry of Finance's proposal
The Ministry of Finance has concluded that the current rules may be vulnerable to undesired tax planning. This assessment has been based on the recommendations from the OECD’s BEPS-project and the report from the Scheel-commission on tax reform in Norway (NOU 2014: 13). The main issue has been whether Norwegian law has made it possible for companies not to be resident in any country, cf. below. In a consultation paper of 16 March 2017, the Ministry of Finance has thus proposed the following changes:
- Norwegian companies: Companies that have been incorporated under Norwegian company law will according to the proposal always remain resident in Norway. This will apply even to companies that no longer have any ties to Norway. The only exception will be where, pursuant to a tax treaty with another country, the company is a resident of that other country, and not of Norway.
- Foreign companies: For companies that have been incorporated under foreign company law, the place of management will still be decisive. However, the assessment will no longer be based on the place of management at board level, only. Pursuant to the proposal, a broad assessment has to be made of whether the "real management (...) takes place in or from Norway". This will include both management at board level and CEO level, and the place of the offices and operations of the company. Regarding the board, one should not only consider where the board meetings take place, but also where the board members have their daily work and reside.
Together, these new rules will mean that a company will be resident for tax in Norway if it is incorporated in Norway and/or has its real management in Norway. The new rules will be more demanding to apply, and they will in some cases lead to double-taxation. We will look at some examples below.
Moving out of Norway
Under the new rules, it will as mentioned no longer be possible to move a Norwegian incorporated company from Norway for tax purposes without liquidating it, unless the company is moved pursuant to a tax treaty. Foreign companies that have been resident in Norway, however, may still be moved from Norway if they lose their connection here. Such emigration may still trigger an exit tax in Norway pursuant to the provisions of the Income Tax Act Section 10-71.
The consultation paper does not discuss European companies ("Societas Europaea") that have been incorporated under the Norwegian Act on European Companies. Will such companies be regarded as Norwegian companies or foreign companies? Presumably, such companies should be regarded Norwegian as long as they are registered in Norway, but become foreign if they are moved to another EU/EEA country pursuant to the Norwegian Act on European Companies section 7 and the regulation art 8. If so, these companies may be moved from Norway for tax purposes if real management is moved out of Norway and they are registered in another EU/EEA-country. This should be clarified in the final bill to parliament.
Moving into Norway
Foreign companies will as mentioned continue to become subject to tax in Norway if the actual management is moved here. Since the assessment will change from management at board level to "real management" in general, this rule may become more important than before. The change may among other things be relevant for foreign subsidiaries of Norwegian companies, where the subsidiary has weak ties to the country of incorporation. One example may be a foreign holding company with few or no employees, and Norwegian board members, only. Depending on the circumstances, the "real management" of such a company may be deemed to be in Norway under the new rules, even though the formal board meetings are held abroad. Such companies should, to be on the safe side, as a minimum have a local managing director and at least half of the board members residing outside of Norway.
Another important change will be that all previously emigrated Norwegian incorporated companies will once again be regarded resident for tax in Norway. This will for example include Norwegian companies that has not been resident in Norway for many years and which do not have any activity here. Under the new rules, these companies will automatically become resident – and subject to tax – in Norway. To avoid this, one should consider liquidating or re-incorporating such companies into foreign companies before the new rules take effect.
There will have to be determined cost prices and depreciations basis for the assets etc. of companies which will become subject to tax in Norway under the proposed rules. A transitional arrangement has been proposed whereby the depreciation basis for fixed assets will be the purchase value less depreciations in accordance with the provisions of the Income Tax Act sections 14 60 to 14-62, while the cost price of other assets etc. will be set at market value.
Resident in multiple countries – tax treaties
As the examples above illustrate, companies may be resident both in Norway and in another country. A company may for example be incorporated abroad, but have all of its activities in Norway. Such double residency will in the future as mentioned occur somewhat more frequently than before, since it will become more difficult for a Norwegian company to be deemed emigrated from Norway and easier for a foreign company to become resident in Norway.
In these cases, it will be the tax treaty between Norway and the other country, if any, which will continue to determine where the company is resident for tax purposes. Pursuant to the tax treaties, a company has traditionally been resident at the "place of effective management". However, it is worth noting that some of Norway's tax treaties lack a residency rule for companies, including the treaty with the United States. Moreover, some of the newer Norwegian tax treaties leave it to the tax authorities of the two countries to decide by mutual agreement where a company is resident. This includes the tax treaty with the United Kingdom. Until such mutual agreement has been reached, the company will be considered resident – and taxable – in both countries.
The current Norwegian rules concerning where a company is resident has made it possible to have "stateless" companies. These are companies which are not resident in any country. For example, a company may be incorporated and registered in Norway but where the actual management on board level has taken place in a country that applies incorporation as the criterion for residency.
Such company structures have been an element in some international tax planning. It has been possible – at least in theory – to use Norwegian companies in these structures. This may give as a result that the company does not pay tax on certain passive income, such as interest and royalties etc., in any country. The amendments which are proposed in the consultation paper will make it impossible to use Norwegian companies in this way.
Duty to submit a tax return
The consultation paper specifies that companies which are incorporated in Norway should continue to have an obligation to submit tax returns to Norway, even if they are no longer liable for tax in Norway pursuant to the provisions of a tax treaty. It is questionable whether this is a restriction on the freedom of establishment which may be contrary to the EEA agreement for companies that have moved within the European Economic Area.
The proposals in the consultation paper will prevent undesirable tax planning involving “stateless” companies. It is understandable that the Ministry of Finance wishes to prevent this. However, another result of the proposed rules will be that companies more often than before will be resident in more than one country and become subject to double-taxation. The introduction of the vague criteria place of "real management" may create considerable uncertainty.
The consultation period will end on 16 June 2017. This indicates that the Ministry of Finance intends to present the proposal in a bill to parliament this fall, presumably as part of the national budget for 2018. The changes are proposed to take effect from the fiscal year 2018.