Recent Developments in Norwegian Tax & Company Law

RECENT DEVELOPMENTS IN NORWEGIAN TAX AND COMPANY LAW: SIMPLER AND MORE EU-COMPATIBLE

By Harald Christensen, partner in Torkildsen Tennøe & Co, Oslo, Norway  

Torkildsen, Tennøe & Co provides a full range of legal services within property, trade and industry. We provide legal assistance to owners and companies that who need long-term or project-based legal advice. Our advice is always given in close co-operation with the client. Our firm  comprises 36 lawyers in Oslo and Bergen.

This year we have seen significant improvements and simplifications in Norwegian tax law and company law, of particular importance to small and medium-sized enterprises. Together, they provide possibilities of change, flexibility and lower costs. They make Norwegian companies more competitive compared to affiliates of foreign companies, which have in many ways become discredited.

In the following, we shall look at some of the highlights. More changes are proposed and in the pipeline. It could be said that these changes represent a trend in current Norwegian legislation within these fields.

1. 1.     Small companies – exemption from annual audits

Companies may decide not to have an annual audit by a chartered accountant (when the annual income is less that NOK 5 million, the balance is less than NOK 20 million, and less than 20 man-labour years).  Still, shareholders may demand a limited audit. This, together with other changes, makes it simpler and less costly to establish private limited companies –provided of course that they are soundly managed by a reliable accountant.

1. 2.     Small companies – minimum required share capital reduced to NOK 30.000

According to a recent law proposal, expected to be ratified soon, the minimum required share capital will be reduced from NOK 100.000 to NOK 30.000 (approx. EUR 3.750). Furthermore, the change will allow the costs of forming and registering the company to be paid from the share capital.

One important consequence – apart from reducing the shareowners’ costs – is that it will be easier to convert personal (unlimited) businesses into private limited companies, which is allowed without taxation on certain conditions.

1. 3.     Tax law – mergers and de-mergers

Until recently, mergers and de-mergers of public and private limited companies were tax free provided they were implemented in accordance not only with tax law, but also with the provisions of company and accounting law. This naturally caused considerable problems among lawyers and accountants, because, for instance, simple formal errors or accounting principle disputes could lead to disproportionate tax consequences. However, this year the problem was solved by taking away the reference to company and accounting law, with effect from 2011. Tax law requirements remain, the most important being that of tax continuity - requiring that previous tax book values should be carried forward in the books of the company or the companies after the merger or de-merger as basis for tax depreciations and/or capital gains tax. 

However, at the same time, another section of the tax law was changed; if the exploitation of the benefit of a tax position appears to be the main reason for a reorganization (including a merger or a de-merger), the tax authorities may set that tax position aside.  For instance, a merged company may no longer be allowed to carry forward losses against future profits.

This is in line with a Norwegian legal tradition developed in case law, which could be called “cutting thorough the veil” or in German maybe “durchgriff”. This tradition allows the tax authorities, on certain conditions, to set aside the form of a transaction or a disposition, for instance a company- or financing structure, and base the taxation on what they find are the realities of the matter. This would apply if, in short, the form of disposition in question has little or no substantial purpose other than to save tax, and may be considered a disloyal evasion of tax. Therefore, it is essential for tax subjects to be able to present well founded business motives and reasons – other than tax – for the dispositions in question, and that these motives and reasons are traceable and appear in documents, for instance board minutes and agreements, prior to the disposition. 

1. 4.     Mergers, de-mergers and share transactions involving companies in the EU

At the same time, also motivated by the wish to adapt to EU rules, the tax law has been changed to allow cross-border mergers, de-mergers and dividends. The new rules allow a Norwegian company to merge with (or de-merge to be merged with) a company in the EU or the EEA, as long as the merger/de-merger is implemented in accordance with Norwegian company law. It also opens for the transfer, without taxation, of at least 90 % of the shares in exchange for shares in another EU/EEA company, and for the formation of European companies (SCE) by way of a merger. Not surprisingly, this is limited to the EU/EEA, but allows for much more flexibility than previously as long as you keep matters within the inner market.

Interestingly enough, it could also present opportunities to work with lawyers in other EU/EEA countries.