In this context, primary capital certificates, units in mutual insurance companies , units in unit trusts and capital units in cooperative enterprises are treated in the same way as shares. The new set of rules is called the ”shareholder model”.
The shareholder model’s area of application
Taxpayers covered by the shareholder model
The shareholder model applies to personal shareholders/ unit holders who have a general tax liability to Norway. In addition, it applies to the estates of deceased and bankrupt natural persons.
A personal shareholder residing abroad is normally not entitled to any risk-free return. Personal shareholders residing in another EEA state are an exception. They can apply for a refund and be granted a risk-free return (see separate section below). Corporate shareholders are not covered by the shareholder model.
Distributions covered by the shareholder model
The shareholder model applies to dividend and similar distributions from:
- private and public limited companies
- savings banks and other self-supporting financial undertakings
- mutual insurance companies
- cooperative enterprises
- unit trusts
- similar foreign companies etc.
Further information about the model
The shareholder model means that dividends and gains, after the deduction of a risk-free return, are taxable like ordinary income.
On calculating taxable dividends/gains, the terms "basis for deduction", "deductible interest rate" and "deductible risk-free return" are used.
Deductible risk-free return = basis for deduction x deductible interest rate
Basis for deduction
The basis for deduction is the opening value of the shares plus any unused deductible risk-free return from previous years.
The basis for deduction is calculated per share and, as a rule, it includes any direct expenses in connection with the acquisition, for example broker’s fees.
The risk-free return may deviate from the above main rule in three cases:
- transition rule for shares acquired before 1 January 2006
- use of the alternative opening value stipulated on 1 January 1992 for shares owned on 1 January 1989.
- valuation of shares acquired by way of inheritance or gift after 1 January 2006.
Use of alternative opening values
For non-listed shares that could have been sold tax-free in 1992, the basis for deduction shall be the share’s proportionate share of the total asset value for tax purposes, or the cost price if the latter can be documented, plus the accumulated RISK amount.
Appraisal values and share of accounting value can still be used as an alternative opening value on calculating gains in connection with any sale of the shares. The rule precluding deductions for loss when accounting values or appraisal values are used as alternative opening values as from 1992 is upheld.
For listed shares acquired before 1 January 1989, the alternative opening value will be equal to the listed value in 1992 plus RISK during the ownership period.
Opening value etc. of shares acquired by way of inheritance or gift after 1 January 2006
When shares covered by the shareholder model are transferred by way of inheritance or as a gift, the recipient shall continue to use the same tax values as the deceased/donor.
The recipient shall continue to use the deceased’s/ donor’s opening value, basis for deduction, unused deductible risk-free return and any other tax positions (for example, the date of acquisition).
This principle is called ”continuity for tax purposes”. If the rule on continuity for tax purposes results in the opening value of the shares exceeding the basis for inheritance tax, the basis for deduction/ opening value will be limited upwards to the basis for inheritance tax, cf. the Taxation Act section 9-7.
Person A owns two shares in a listed company. One was bought for NOK 200 in 1995, the other was bought for NOK 900 in 1999.
On 1 January 2006, the opening value of the shares was:
|Share no 1, bought in 1995
||= NOK 500
|Share no 2, bought in 1999
||= NOK 1,100
In March 2006, person A dies. Person B is sole heir and inherits both shares. At the time of death, the shares have a market value of NOK 1,000.
Based on the rules on ”continuity”, person B will take over the following opening value/ basis for deduction on inheriting the shares:
Full continuity will apply to share no 1, which had an opening value of NOK 500 on 1 January 2006. Person B takes over the deceased’s opening value/basis for deduction of NOK 500 for the share.
The opening value of share no 2 on 1 January 2006 will be higher than the inheritance tax value (market value) at the time of death. Pursuant to the Taxation Act section 9-7, the heir’s share opening value and the basis for deduction shall be equal to the inheritance value. For share no 2, the opening value and basis for deduction will be NOK 1,000.
Deductible interest rate
The Directorate of Taxes calculates and announces the deductible interest rate in January in the year after the income year, i.e. the deductible interest rate for 2008 will not be decided before January 2009. The deductible interest rate is published at www.skatteetaten.no.
For the income year 2007, the deductible interest rate was fixed at 3.3 %.
The deductible interest rate is calculated on the basis of the average observed interest rate on Treasury notes with 3 months’ maturity. The interest rate is adjusted downwards by 28 % (the tax rate for ordinary income) and rounded off to the nearest tenth percentage point.
Deductible risk-free return
The risk-free return shows the amount of dividend that can be received tax-free.
The tax-free return is the basis for deduction multiplied by the deductible interest rate. The risk-free return is calculated for each share owned on 31 December in the income year. If shares have been sold during the income year, no risk-free return will be calculated for the person who sold the shares (the “seller”). If anyone, it is the person who owned the shares on 31 December (the ”buyer”) who will be entitled to the deduction.
The right to a risk-free return is conditional on the dividend having been legally declared.
If, in any one year, the amount of dividend is smaller than the risk-free return on a share, the remaining risk-free return on the share may be carried forward. The risk-free return between various shares/ share acquisitions cannot be coordinated. The risk-free return cannot be a negative amount.
If the dividend is greater than the risk-free return, the excess amount will be taxed as ordinary income (i.e. at a rate of 28 %).
Calculating gains in accordance with the shareholder model
When a share is sold, the gain/loss should, as a rule, be calculated as follows:
By deducting the opening value from the closing value.
The alternative opening value may be used if the shares were owned on 1 January 1989.
Any gain is then reduced by the unused deductible risk-free return from previous years.
Any loss as a result of the opening value being higher than the compensation received, will be deductible from the person’s ordinary income. The risk-free return is only deductible up to the point where the taxable gain equals zero. Loss as a result of the deduction of the risk-free return itself is not deductible (see example below).
Any unused risk-free return will lapse when the share is sold.
The shareholder model for personal taxpayers residing in Norway who own shares etc. in foreign companies
A personal shareholder residing in Norway is entitled to deduct a risk-free return if he/she owns shares/units abroad which are deemed to correspond to the Norwegian companies covered by the model. See the list under ”Distributions covered by the shareholder model” above. Whether the company is domiciled in an EEA state or not makes no difference in this context.
The shareholder is only entitled to a risk-free return if the dividend was legally declared.
In addition to the shareholder being liable to pay tax in Norway of such dividend, the dividend will normally also be liable to withholding tax in the state in which it is distributed. The taxpayer can claim a deduction in the Norwegian tax on the dividend (credit deduction) for the withholding tax paid abroad.
The shareholder model for shareholders residing in the EEA area who own shares in Norwegian companies
A personal shareholder residing abroad is liable to pay tax on dividend declared by companies domiciled in Norway (withholding tax). A personal shareholder who is tax resident in another EEA state, is entitled to deduction of the risk-free return pursuant to the rules applying to shareholders who are tax resident in Norway. This is conditional on the dividend being legally declared by the company domiciled in Norway.
The risk-free return shall not be taken into account on deduction and assessment of withholding tax.
When the amount of withholding tax deducted exceeds the amount of tax that is payable by the shareholder on the dividend after deduction of the risk-free return pursuant to Norwegian rules, the taxpayer can apply for a refund of the excess withholding tax paid. All such cases are handled by the Central Office for Foreign Tax Affairs.
If the deductible tax-free return exceeds the dividend for the year, the unused amount can be carried forward for deduction from dividends on the same share in subsequent years. Any deductible tax-free return in excess of the year’s dividend will lapse if the taxpayer does not claim a refund for excess withholding tax paid on the basis of the right to a risk-free return. The same applies if the risk-free return cannot be utilised as a result of the withholding tax under a tax treaty being lower than the calculated tax on dividend after deduction of the risk-free return.
A Swedish personal shareholder owns shares in a Norwegian company. The gross dividend to the shareholder is NOK 100. The tax-free return on the shares amounts to NOK 8. The company deducts 15 per cent withholding tax from the gross amount of dividend, so that the shareholder is paid NOK 85 by the company. Taxable dividend after deduction of the risk-free return is NOK 92, and 25 per cent tax amounts to NOK 23. Since the taxpayer has paid 15 per cent withholding tax under the tax treaty, he/she cannot claim a refund for the withholding tax paid. In this case the tax-free return lapses and cannot be carried forward to subsequent years.
If we change the example so that the risk-free return amounts to NOK 50, the amount of tax will amount to NOK 12.5 (100-50=50 * 25 % = 12.5) under Norwegian domestic rules. This amount falls short of the amount of tax deducted under the tax treaty (which was NOK 100 * 15 % = NOK 15), and the taxpayer can claim to have the difference of NOK 2.5 (15 – 12.5 = 2.5) refunded. In this case the whole tax-free return is utilised.
Taxation of share gains after moving abroad
As from the income year 2007, a general moving-abroad tax has been introduced on latent gains on shares and units deemed to be equivalent to shares for tax purposes, so that the value increase during the period when the taxpayer resided in Norway is liable to taxation in Norway when the taxpayer is no longer liable to pay tax to Norway under Norwegian domestic law or a tax treaty. This shall only apply when the total gains exceed NOK 500,000. The tax liability lapses if the shares or units are not sold within five years of the person ceasing to be a tax resident of Norway, or if the taxpayer becomes liable to taxation pursuant to the Taxation Act section 2-1 before the shares are sold.
Entry into force
The shareholder model was introduced with effect from the income year 2006.