Tax and VAT - Norwegian National Budget 2022

The Norwegian National Budget was presented on 12 October. Below you will find an overview of the most important changes concerning Tax and VAT. The article is divided into four main categories: 1) Personal Tax 2) Corporate Tax 3) VAT og 4) Excise Duties. There were no big surprises in this year's budget, but proposals that can be important to each respective sector. The budget was presented by on the last day of the government and it will be interesting to see if the new government will make any adjustments to the part related to tax and VAT.

1. Personal Tax

New tax deduction to stimulate young people to work

The Norwegian Government has suggested introducing a deduction of NOK 23 500 to stimulate young people between 17 and 29 years to work. The deduction reduces the tax of up to NOK 5 170. The tax benefit will not apply for income over NOK 535 000.

For income up to NOK 300 000, the tax will be reduced by NOK 5 170. The suggestion aims to make more young people work, by making it more attractive to work and receive a salary, rather than to receive social benefits.

It is becoming even more favorable for employees to invest in their workplace

In accordance with current regulations, employees can buy shares in the employer company at a lower price than fair market value. As a starting point, this payment in kind is regarded as taxable salary income for the employees, but there is an exemption if all the employees are offered to buy shares.

Previously the individual employees have had the opportunity to buy shares with a discount of 25 % of the market value, but with a threshold amount of NOK 7 500.

The Government is now proposing to raise the discount up to 30 %, but keeping the threshold amount of NOK 7 500.

This proposal will make it more favourable for the employees to invest in the employer company, and we assume it will make the arrangement more attractive both to employers and to the employees. 

Deduction for travel expenses is simplified at a fixed rate per kilometer

The current rules for travel expenses, i.e. a tax deduction of NOK 1.56 per kilometer up to 50 000 km with a limitation to NOK 0.76 over 50 000 km are proposed to be repealed.      

The Norwegian Government proposes instead to introduce a deduction at a fixed rate of NOK 1.65 per kilometer.

This will especially benefit those with long travelling distance, both in Norway and people resident in other EEA-countries.

Additionally, changes are proposed regarding the threshold amount before a deduction is granted. In 2021, this rate was equal for everyone with NOK 23 900, and a deduction was only provided if this threshold was met. The current proposal distinguishes between whether the taxpayer resides in a municipality with a high or low centrality. Most people will still have a threshold amount of NOK 23 900, while those who live in a municipality with low centrality will have a threshold amount of NOK 14 000 before being entitled to a deduction. 

Employee share options in start-up companies can receive tax free options worth NOK 3 million

The current rules for taxation of share options for employees in start-ups have neither been appropriately designed nor been widely used. The government now proposes a new solution to make the scheme more attractive.

In accordance with the current rules for share options under employment, the difference between the fair market value of the share at the time of redemption of the share option and what the employee pays for the share option is considered as taxable salary income, and the taxation point is upon exercise of the option. The taxed amount would also be the cost price of the issued shares.

The new proposal suggests that share options shall not be taxed as salary income upon exercise of the option, but that the entire taxation takes place once the shares are sold. This will enable the employee to keep the shares in the company rather than sell the shares to cover the tax liability.

The value of options granted to employees can maximum be NOK 3 million, and employees will not be taxed when the option is exercised. It is only when the shares are sold that the tax liability arises. Further, gain will not be taxed as salary income, but as capital income based on the increase in value.

It is a requirement that the exercise value is not lower than the market value of the shares at the time of grant. This entails that if the employee is allotted shares worth 100, and these have a value of 200 at the time of redemption three years later, the employee must pay 100 for the shares. The remaining increase in value is deferred for tax purposes and the tax will be payable once the employee sells the shares.  

The rules will not be applicable if the share option indicates a lower value than fair market value at the time of grant. In this case the options will be treated under the ordinary tax rules for share options under employment.  

Note that there are several conditions that need to be met for the rules to apply. For example, the company can be maximum 10 years, have up to 50 full-time equivalents, and can not have more than MNOK 80 in operating revenues or balance sheet total. Further, the employee must be employed by the company, and work at least 25 hours a week from the grant of the option until the option is redeemed. The employee can not own more than 5 % of the company.

Despite these limitations, we assume that these rules will make it much more attractive for both start-ups and growing companies to offer options to employees. In addition, the rules contribute to international harmonisation, as the proposal is in line with similar foreign management incentive schemes.

2. Corporate Tax

Group contributions to foreign subsidiaries

In the “Yara” ruling (HR-2019-140-A), The Supreme Court ruled that the Norwegian group contribution rules include a right to deduct group contributions to foreign subsidiaries domiciled within EEA when the contribution covers a "final loss" in the subsidiary. The ruling was based on the EFTA Court's advisory opinion of 13 September 2017. The Ministry proposes to enact the rule, to ensure that the group contribution rules do not conflict with EEA law.

Since a right to deduct group contributions to foreign companies entails the possibility of reducing the Norwegian tax base, the new provision will only be of the scope required by EEA law. The Ministry also proposes to use the wording "final deficit" instead of "final loss".

The Consultation Document states that "final deficit" refers to the fact that there is no possibility, either now or later, for the subsidiary or anyone else to utilise the deficit in the state in which the subsidiary is resident. An additional condition is that no later than after the end of the income year in which the group contribution is to be paid, a liquidation process must have been initiated for the subsidiary. As a general rule, the subsidiary must be liquidated by the end of the income year following the year of the final deficit.

In the Consultation Document it was proposed that this does not include losses from previous years. However, the Norwegian Government has now decided to also include losses from previous years. 

The right to deduct a group contribution shall not apply to a company that has been merged into a group company. The size of the deduction may not exceed the lowest of; the loss calculated according to Norwegian tax rules and the tax rules in the subsidiary's resident state respectively. The Ministry also proposes that special rules are laid down for calculating the size of the deduction.

It is proposed that the changes come into force immediately, with effect from 2021.

Resource rent taxation for hydropower - Corporate tax deduction

As of 1 January 2021, cash flow based pure rent tax was enacted, which entails that power companies can expense their investment costs directly when assessing the resource rent income. Read more here (Norwegian).

To ensure that the cash flow tax is neutral, a correction must be made for corporate tax in the resource rent income. This issue was briefly discussed in Prop. 1 LS (2020-2021), but not finally clarified. On 11 May 2021, proposals for different models for such correction were announced for consultation. Based on this consultation, it is now proposed to introduce a sequential calculation method for corporate tax and resource rent tax, where it is corrected for corporate tax in the pure rent tax base.

The proposal implies that the corporate tax for power production is first calculated ("resource rent related corporate tax"), and that it can be deducted from the resource rent tax base. Resource rent related corporate tax entails income and expenses that can be attributed to power production, and thus not other activities than power production.

When the resource rent related corporate tax can be deducted from the resource rent tax, this entails that the tax base in the resource rent tax will be lower, and it is therefore also proposed that the resource rent tax rate is adjusted from 37 % to 47.4 % to keep the same effective marginal tax as today at 59 %.

The proposal will have a number of practical consequences for the power companies if adopted, including that corporate tax must be calculated separately for each power plant to ensure the correct basis for property tax, and any negative resource rent related corporate tax must be carried forward and reduced to positive corporate tax in future years. 

Adjustments to the tax free interest rate as well as negative resource rent carried forward from before 2007 have also been proposed, in addition to clarifications on how to deal with the deficit carried forward from before 2021 in the calculation of corporate tax. We will revert with a separate article that discusses the proposal in detail, and also consider some of the consultation input and how the ministry has responded to these.

It is proposed that the changes come into force immediately, with effect from 2021.

Excise duty on onshore wind power

The Government proposes to introduce a production fee for onshore wind power. The proposal is designed as a special fee of 1 øre per kWh produced, which is then distributed to the host municipalities based on the location of the wind turbines. The proposal is mainly based on the model proposed in the revised national budget for 2021. It is proposed that further consideration be given to how the transfers to the host municipalities are to be administered and distributed.

The duty is limited to wind power plants that are subject to a license requirement under the energy legislation. Furthermore, offshore wind turbines are not included in the scope of the proposal. This delimitation raises the question of whether the proposal may involve state aid for offshore wind power in accordance with the EEA Agreement, which should be clarified with the EFTA Surveillance Authority before the tax enters into force. It is therefore proposed that the excise duty will take effect from the time determined by the Ministry. It has not been clarified whether the tax will have effect for the income year 2022 or from 2023.

Wind power production is currently only to a small extent covered by special tax rules. The industry is subsidized through favorable depreciation rules for fixed assets acquired up to and including the income year 2021 as well as the electricity certificate regime. In addition, municipalities can choose to levy property tax on wind turbines. The introduction of a production tax can thus be said to represent a step towards a special tax regime for wind power producers.

Conversion of the special tax for petroleum activities to a cash flow tax

On 3 September 2021, the Ministry published a proposal to convert the special tax for petroleum activities to a cash flow tax from the income year 2022. The consultation deadline is 3 December 2021. The Ministry proposes that the proposal should be submitted to the Norwegian Parliament (Storting) in a bill in the spring of 2022. You can read more about the proposal in our previous blog post here (Norwegian). 

Changes in the Norwegian tonnage tax regime

All private and public limited companies that are engaged in shipping, etc., are in general taxed according to the ordinary rules for limited companies. Private and public limited companies that meet certain conditions may opt to be taxed under the Norwegian tonnage tax regime.Companies within the arrangement are in general exempt from tax liability on ordinary income. 

Net financial income, on the other hand, will be subject to tax. In addition, shipping companies are obliged to pay a special tonnage tax. Within the tonnage tax regime, the companies may not conduct activities other than those specified in the scheme. In the National Budget, the government follows up on decisions by the Parliament (Stortinget) to introduce certain types of shipping-related activities that are currently not permitted within the shipping tax scheme. The purpose of the changes is to provide the companies within the scheme a greater degree of flexibility than the current regulations allows. Such shared activities in the tonnage tax regime entails that the scheme must go through a new notification process in ESA. The Government further proposes that a final bill will not be submitted to the Parliament until approval from ESA has been given.

Clarification of deductions for NOKUS (CFC) participants

In the revised national budget for 2021, rules were introduced on tax deductions for NOKUS participants in cases where the NOKUS company pays withholding tax on interest and royalties etc., and the participant is taxed for the same income. The rule prevents double taxation. The deduction is now provided for a proportionate part of the tax the company "has paid". The company, on the other hand, can apply for a refund for up to 3 years if it has paid too much tax where a double tax treaty reduces the rate. If the participant has received a deduction at a high rate, rules must be given that this deduction must also be readjusted. Due to the administrative resources needed for such rules, the Ministry proposes to prevent this through limiting the participant's deduction to the tax rate in the double tax treaty.

Taxation of international companies

The Government states that petition no. 1141 (2020-2021) has been followed up, as Norway has taken an active role in international co-operation which aims to ensure regulations for effective taxation of international technology companies. An international agreement on taxation of large multinational enterprises was entered into on 8 October 2021 in the OECD / G20 forum "Inclusive Framework". You can read more about the agreement here. According to the plan, the rules will be incorporated in national legislation by 2022, with effect from 2023.

3. VAT

Timing of VAT reporting and payments in the construction sector

The Parliament has asked the Government to propose a change in the rules regarding the timing of VAT reporting and VAT payments on claims subject to dispute within the construction sector.

The Norwegian ministry of finance advises against such change, as such a change will result in a favorable treatment of specific businesses that can be considered as state aid in relation to the EEA agreement. Furthermore, disputes relating to final settlements in larger contractual relationships are not unique for this business sector, and businesses in general face challenges when a final settlement is disputed because of the liability to report and pay the VAT amount. 

As the Parliament has asked the government to suggest concrete changes in the rules, the Ministry of Finance has prepared a bill proposal, where they propose to include a rule saying that businesses can postpone issuing the sales document if there is, objectively, a reasonable doubt of whether the creditor is entitled to the consideration in question. 

Furthermore, the Ministry of Finance states that such a rule should not be applicable for disputed claims between related parties and that it will be necessary to define what a “disputed claim” actually is. 

VAT on non-life insurance – to be considered by the Norwegian Ministry of Finance

In line with the signals given in the state budget for 2019, the Ministry of Finance has continued to look at the consequences of expanding the VAT base to include insurance against loss and damage. 

The starting point is still that this kind of insurance is suitable for VAT liability, and that VAT should replace the finance tax for this sector. VAT on non-life insurance still requires more work, among other things with regard to which insurances are to be covered by the VAT liability, the calculation of the VAT basis, as well as cross-border elements. The Ministry announces that they will continue working on the proposal.

4. Excise duties 

Road tax on fuel

The road tax on fuel applies to different types of fuel, including petrol, mineral oil / diesel, bioethanol, biodiesel, LPG and natural gas. Measured by energy content, the level varies between the different types of fuel. In order to equalize the road tax on fuel, the Government proposes to adjust the prices on fuel.

Electricity, hydrogen and biogas are not covered by the tax. Due to the increased use of electric vehicles with a corresponding reduction in the revenue, The Government has requested the tax authorities to study the scheme. The project will be completed within a year and a half.

CO2 tax

In order to achieve the climate goals, The CO2 tax rate is proposed to increase by 28 % on petrol, mineral oil, non-quota aviation, natural gas and LPG.

The greenhouse industry currently has an exemption from the CO2 tax on natural gas and LPG, but the Government has proposed to introduce a CO2 tax that corresponds to 20 % of the ordinary tax. The tax will increase year by year until 2026 when the aim is to introduce a full tax.

Finally, it is proposed to increase the CO2 tax rate on emissions of greenhouse gases from the petroleum industry and aviation, which are subject to quotas. For petroleum activities on the continental shelf it is proposed to increase the tax on natural gas and mineral oil by 15 %. For mineral oil used in aviation subject to quotas, it is proposed to increase the tax by 5,4 %.

Air Passenger Duty (APD)

In March 2020, the Air Passenger Duty was temporarily abolished as a relief for the airlines during the pandemic.The temporary relief has been extended in several rounds and is valid until 2021. The Government proposes to reintroduce the tax from 2022 at a rate of NOK 80 per passenger for flights with destinations in Europe and NOK 214 per passenger for other flights. The rates correspond to the rates before the covid-19 outbreak, but are price-adjusted to 2022-level.

Registration transfer fee and road traffic insurance for electric vehicles

To limit the decreased revenue fall due to the increased use of electric vehicles, The Government proposes to introduce a registration transfer fee for electric vehicles. In addition, it is proposed to introduce a full road traffic insurance tax for electric vehicles in 2022.

One-off registration tax for rechargeable hybrid vehicles (plug-in hybrids)

Currently all plug-in hybrids with a registered electric range of 50 km or more get a 23 % deduction for weight before an assessment of the one-off registration tax is made. In order to strengthen the incentive to buy electric vehicles, The Government proposes to reduce the deduction rate from 23 % to 15 %. In addition, the Government proposes to increase the electric range from 50 km to 100 km to get the maximum deduction of 15 %.

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This blogpost is written by Cornelius Rieber-Mohn, Erik Stenvik Granly
Jacob Gjerdrum Nordby, Kjetil Øpstad, Lars Walby, Linn Katrin Hansen, Marit Barth, Mats Hennum Johanson, Pernille Abildsnes, Ronja Sommer, Silje Toftegaard, Synne Hangeland, Tom Birger Larsen and Torbjørn Sven Stokke.