The proposal for the revised national budget 2017 was presented on 11 May. The most interesting proposals relate to tax deductions for investments in start-up companies and postponed taxation of employee options. This article provides an overview of the key proposals within corporate taxation, VAT and personal taxation.
Deductions for investments in start-up companies
The Ministry of Finance proposes to introduce a tax incentive scheme whereby personal taxpayers investing in limited liability companies can obtain a tax deduction in ordinary income. The object of the proposal is to increase the willingness to invest in relatively new companies and start-up companies. If approved, the new rules will have effect from 1 July 2017.
Requirements for the company:
The company in question must meet the following requirements in order to qualify as an investment object under the new rules:
- The company must be a limited liability company - no other company form is comprised by the scheme;
- The company must be 6 years or younger;
- The company must have fewer than 25 employees (full-time equivalents);
- The yearly basis for salary must be a minimum of NOK 400.000;
- Neither running income nor the balance sheet total may exceed NOK 40 million (measured at the end of the year of establishment/the year of the capital increase, or the following year);
- The company must mainly carry out activities that are not passive asset management (discretionary assessment);
- The company cannot be controlled with more than 24 % by one or more public bodies;
- The company cannot have “economic difficulties” at the time of the investment;1
- The company must be tax resident in Norway or have a permanent establishment here (limited tax liability).
Requirements for the investor/investment
The ivestor/investment in question must meet the following requirements in order to qualify for the tax deduction:
- The investor must be a private individual that invests either directly or through a holding company in one chain;
- The acquired shares must be owned for at least 3 years (the maturity period) ;
- The minimum investment amount is proposed to be NOK 30.000;
- The contribution must either (i) be treated as a capital increase by subscription of new shares, or (ii) be rendered in connection with the establishment of the company. Contributions in kind seem to be comprised by the scheme;
- The investor cannot be an employee or a former employee of the company, or become an employee during the 3 year maturity period;
- The investor cannot be a shareholder, employee or former owner of a previous company or a company in the same group of companies if the company is established upon merger, demerger or “tax free” transformation;
- The investor or any of the investor’s related parties cannot receive distributions in the form of dividends or capital decreases during the 3 year maturity period.
Maximum investment amount
Tax deductions may be granted up to a total of NOK 500.000 per year. With a tax rate of 24 %, this means that upon a maximum investment one receives NOK 120.000 in return.
One company may receive up to NOK 1.5 million per year within the scheme. The company is responsible for reporting to the tax authorities and for assessing whether the requirements are met.
Tax value of the shares
The proposal does not discuss how the tax value on the shares acquired under the scheme is to be determined. General tax principles could indicate that the obtained tax deduction would reduce the input value. However, when the tax value on the shares is not discussed in the proposal, this may be interpreted so that the entire share contribution can go towards the tax value and paid-up capital. A consequence of this would be that the share capital may be realised without taxation after the expiration of the maturity period. This would entail that if the company goes bankrupt and is liquidated, the taxpayer would obtain a double tax deduction for his or her contributed capital within the investment limit of NOK 500.000.
The Ministry does not specifically discuss what will happen with the tax deduction if the company e.g. goes bankrupt and is liquidated during the 3 year maturity period. The wording of the proposed provision indicates that the requirements for obtained deductions would not be met in such a situation and that the investor is referred to the general rules on deductions upon the realisation of shares.
The FIFU principles (first in, first out) is proposed not to apply in the 3 year maturity period.
Taxation of share options for employees in small, newly established companies
The Ministry of Finance notifies that the government will propose amendments in the rules on taxation of employee share options in small, newly established companies in the National budget for 2018. The Ministry does not discuss what lies in the phrase “small, newly established companies”.
The current rules entail that the benefit that the option constitutes is taxed as salary upon the date of redemption, i.e. when the option is exercised and the employee acquires the shares. The taxed amount is added to the input value in addition to the redemption price. Subsequent increases in value on the shares is taxed as ordinary income.
The outlined proposal
The outlined proposal entails a postponement of the date of taxation in such companies to the moment of the disposal of the shares. Such a change will also entail a postponement of the payroll taxes for the employer.
With respect to the taxation of the employee, such an amendment will necessitate a decomposition of the gain on the share in (i) one part that is taxed as salary and (ii) one part that is taxed as a capital gain. Thus, the outlined proposal will contain provisions of a combined taxation at the date of realisation.
The Ministry outlines a solution where, at the time of the redemption of the option, an option benefit is calculated based on the current rules, but with no stipulation or payment of the tax or payroll taxes. When the shares are realised and taxation is to happen, any gain limited upwards to the calculated option benefit is taxed as salary, while the exceeding gain is taxed as a capital gain. Furthermore, the Ministry outlines that if a realised capital gain is lower than the calculated option benefit, the tax liability for the exceeding amount is annulled.
The scheme is to be further discussed and a concrete proposal is said to be put forward in the National budget for 2018. The scheme will entail state aid and must be approved by ESA before implementation.
The VAT exemption for electronic news services
When the National budget for 2017 was presented, the Government and the cooperating political parties also presented a budget agreement, listing a number of topics that the Government should follow up on.
One of the topics to be considered concerned the widening of the scope of the VAT exemption for electronic news services, in particular in relation to comprising all digital journalism. This would entail that e.g. the supply of access to single articles should also be comprised by the exemption. The Government was to get back to this in the revised National budget.
The proposal in the budget agreement is the same as presented in the report “Det norske mediemangfoldet”2. The committee that has written the report suggests widening the scope of the exemption to comprise both the sale of single articles and to comprise all news- and current affairs media, including publications that predominantly provide information about only a few sectors or a few interests.
In the revised National budget, the Government states that as the report is currently in consultation process, the subject will be revisited in the National budget for 2018.
1Economic difficulties is an EEA term relating to companies that are the subject of insolvency treatment or that meet the requirements to be subject of insolvency treatment under national law
2NOU 2017: 7
My name is Cecilie Beck Landet and I work as an associate lawyer at PwC Tax and Legal Services. I assist clients with general tax advice on Norwegian and international corporate tax law, as well as in connection with national and cross border restructurings. I have worked at PwC Tax and Legal Services since January 2015 and have previously worked with tax law as a research assistant at the University of Oslo and at another law firm.
If you have any questions, comments or input, feel free to contact me!