Businesses assessed as a partnership and the tax reform

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The rules for the taxation of businesses assessed as a partnership were revised with effect from 2006.

Until 2006, the so-called ‘sharing model’ was applied to businesses assessed as a partnership. The sharing model meant that, in addition to general income, personal income from the profit share was calculated for active partners with a holding of more than two thirds or a claim to more than two thirds of the business’s profit. Personal partners must now pay tax on amounts distributed by the business. This tax will be in addition to the general income tax on the partner’s share of the profit generated by the business. The rules concerning the taxation of partners are often referred to as the ‘partner model’. If a partner receives remuneration for work carried out for the business, personal income from this remuneration must still be calculated.

The business must be engaged in commercial activity

The business must carry on commercial activity in order for it to be considered a business assessed as a partnership.

In order for it to be considered commercial activity, a business must:

  • carry on commercial activity which is expected to have a certain duration
  • have a certain scope
  • be intended to generate a profit, and
  • be carried on at the business’s own expense and risk.

There is no requirement for the partner to actively take part in the running of the business. The business also does not need to be registered with the Brønnøysund Register Centre.

Businesses that have carried on activity but have now ceased trading can be divided into three main categories with regard to tax-related dissolution: 

  1. Businesses that are formally dissolved in accordance with the provisions of the Partnership Act will be considered to have been dissolved for tax purposes when they have been dissolved pursuant to the Partnership Act. 
  2. Businesses that are not registered in the Register of Business Enterprises but have ceased trading will be considered to have been dissolved when the activity ceases. 
  3. Businesses that are registered in the Register of Business Enterprises but have not been formally dissolved under the Partnership Act. For such businesses, it is a condition for tax dissolution that no tax returns have been submitted for the past two years. Requiring tax returns to be submitted in order not to be considered has having been dissolved for tax purposes also safeguards the Norwegian Tax Administration’s need to acquire information about the business. If the business has a board of directors or a general manager, the reporting obligation will apply to them. In the case of businesses which do not have a board of directors or a general manager, the reporting obligation will be jointly incumbent on the partners, or alternatively a designated representative. The submitted tax returns must be reasonably complete and correct. Tax returns that are so deficient that a discretionary assessment is necessary will not be considered to fulfil the reporting obligation.

Tax in connection with distributions from a business

In addition to the partner’s tax on the share of the profit, personal partners from 2006 onwards must pay tax on distributions from their business. In principle, a distribution from a business is any type of transfer of assets, including cash transfers, transfers of any type of asset, the provision of services, as well as the partner's free or subsidised use of the business’s assets.

Assessment of a partner's cost price

The cost price of a share is set either to the partner’s contribution to the business or to the fee and purchase costs. Contributions can consist of both capital and assets.

The cost price is of significance to the basis for the deduction for risk-free return, which is used to calculate the distribution tax and in the event of the subsequent realisation of shares. The cost price was finally assessed in 2007 (applies to the 2006 income year) with effect for future distributions and the calculation of gains upon realisation. The basis for the deduction for risk-free return relating to the partner's share may change during the period that the partner owns the share.

If the partner already owned a share before the transition to the partner model (1 January 2006), the cost price will be determined using a transitional rule. The cost price for such shares will be set to:

The partner’s actual share of the business's fiscal values (share of fiscal equity adjusted for skewed equity) as of 1 January 2006
+/- Excess or reduced price upon acquisition of the share
+ Costs incurred by the partner in acquiring the share which are not taken into account in the assessment of excess/reduced price
+/-  Differences upon merger or divestment pursuant to Section 11-7(4) of the Tax Act, as the provision was worded up to and including 2005.
=  cost price (basis for deduction for risk-free return) as of 1 January 2006

Example:
A business has two partners, A and B, each of whom owns 50 percent of a business. The business's total fiscal equity as of 1 January 2006 is NO 1,000,000 (item 189 of the business return, 2005 ). A has NOK 50,000 in skewed equity (positive). Partner A purchased his share in 2000. During the assessment for A for the 2000 income year, it was determined that A paid an excess price of NOK 100,000 for his share. In addition, A incurred NOK 10,000 in connection with the acquisition of his share (in addition to the excess price).

Input value as of 1 January 2006 for partner A:
Partner A’s share of the business’s fiscal values,
adjusted for skewed equity (NOK 1,000,000/2 + NOK 50,000) = NOK 550,000
+/- Excess or reduced price in connection with acquisition of the share NOK 100,000
+ Costs attributable to the acquisition in addition to the excess/reduced price NOK 10,000
= cost price (basis for deduction for risk-free return) as of 1 January 2006 NOK 660,000

Calculation of the tax upon distribution

When calculating the tax on distributions, a reduction must first be made for ongoing tax (ordinary income tax) which relates to the partner's share of the profit A deduction for risk-free return must also be given. The deduction for risk-free return is determined by multiplying the basis for the deduction for risk-free return by a risk-free interest rate. The risk-free interest rate is determined annually by the Directorate of Taxes.

The tax calculation in connection with a distribution will then be as follows:

Distribution from the business
-          Ongoing tax on the partner’s share of the business’s profit (normally 25 percent)
-          Basis for deduction for risk-free return x risk-free interest rate
=          Basis for tax on distribution

The basis is included in the partner's ordinary income tax and multiplied by your tax rate for general income (the rate for general income tax in 2016 is 25 percent; in Finnmark and some municipalities in Troms, the rate is 21.5 percent).

For personal partners, the basis for tax on distributions will then be multiplied by 1.15. Upward adjustment is carried out during the tax calculation by the Norwegian Tax Administration (new from the 2016 income year inclusive).

Non-genuine” deposits/repayments

As before, ordinary income tax will continue to be calculated on the business’s ongoing profit. This income tax must be paid by the partners themselves even if insufficient funds are distributed by the business to cover the tax that is payable. The partner must then cover the tax from their own funds.

Tax that is covered by a partner's own funds will be considered to be a contribution from the partner (non-genuine contribution) for tax purposes. In the same way as ordinary contributions from the partner, this contribution will impact on the partner's basis for the deduction for risk-free return in connection with subsequent distributions. The non-genuine contribution will also reduce any tax liability in connection with the subsequent realisation of shares.

If the business records a deficit, the partner can deduct the deficit from other general income. For tax purposes, the fiscal value of the deficit (the deficit multiplied by the partner’s rate for general income) is considered to constitute the repayment of contributed capital in the business. The repayment reduces the basis for the deduction for risk-free return (non-genuine repayment).

The basis for the deduction for risk-free return will be adjusted during the year after this non-genuine contribution/repayment took place.

 

Tax upon the realisation of shares

Gains made upon the sale or other realisation of shares in a business assessed as a partnership are taxable as general income for the party that realises the share. Losses are deductible from general income.

For some businesses which are separate tax entities (AS, ASA, etc.), extensive exceptions from tax liability for gains and the deduction entitlement for losses upon the realisation or withdrawal of shares (the exemption method) will apply with effect from 1 January 2006. This also applies to businesses assessed as a partnership if the sale or realisation took place on or after 12 May 2006.

The admission of new partners through contributions and changes to a partner's holding in connection with contributions will not be considered to constitute realisation for the other partners.

If partners increase their holding as a result of other partners withdrawing from the business (see Section 2-32 of the Partnership Act onwards), this will not be considered to constitute the acquisition of shares for the remaining partners. The withdrawing partner will be deemed to have realised his share.

The repayment of contributed capital will not be deemed to constitute the realisation of the share, and there will be no tax liability for the partner. 

The gain or loss on the sale or other realisation of shares should be calculated for the business holding. The gain or loss will be set to the difference between the input value (the consideration) for the share and the input value of the share. With effect from the 2007 income year, the gain may be reduced by the unutilised risk-free return from the same business. This will not be relevant for the 2006 income year. Unutilised risk-free returns cannot result in the income being reduced below zero or a deductible loss being increased.

Gains/losses on the sale of shares are calculated as follows:
Consideration for the share
- Net cost price of the share
- Acquisition costs
- Net contribution to the business at the time of realisation
+/-  Changes to the basis for the deduction for risk-free return (non-genuine contribution/repayment)
= Gain/loss

For personal partners, the gain or loss after any deduction for unutilised risk-free return in connection with the tax calculation will be multiplied by 1.15 (from the 2016 income year). The same applies to bankruptcy estates and decedent estates of personal partners.

Relevant returns for businesses assessed as a partnership include (but are not limited to):

  • RF-1167 Income statement 2 or RF-1175 Income statement 1
  • RF-1215 Selskapsmelding for selskap med deltakerfastsetting (Company tax return, etc. for business assessed as a partnership - in Norwegian only)
  • RF-1221 Deltakerens melding over egen inntekt og formue
  • i selskap med deltakerfastsetting (Partner statement of income and assets in business assessed as a partnership - in Norwegian only).
  • RF-1233 Selskapets melding over deltakerens inntekt
  • og formue i selskap med deltakerfastsetting (The business’s statement of partner income and assets in a business assessed as a partnership – in Norwegian only).

The returns must be submitted electronically via www.altinn.no. The deadline is 31 May.

If you have any questions concerning the rules or completion, see

or you can contact the tax office. 

See also

For more information, you can also read the Directorate of Taxes’ statement of principles concerning the conditions for assessment as a partnership of Norwegian partners in foreign businesses.

 

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