Inventory is valued at cost. Cost is normally determined using the first in first out (FIFO) method. The last in first out (LIFO) method is not acceptable for tax purposes. Conformity between book and tax reporting is not required.
Capital gains realised in the course of a business activity are almost always regarded as taxable income. Gains resulting from real estate transactions are taxed, regardless of whether they are incurred in connection with business activity. Losses may be offset against the taxpayer’s other income.
Capital gains realised on both business-related and non-business-related securities are, in principle, taxable. In general, any capital gains realised on bonds at maturity are regarded as taxable income. Correspondingly, realised losses will be eligible for deductions.
Tax-exemption rules for corporate shareholders
Under the tax-exemption rules, corporate shareholders are generally exempt from tax on dividends received and capital gains on qualifying shares and on derivatives where the underlying object is qualifying shares. Correspondingly, losses on shares are, in general, non-deductible. All operational expenses related to exempt income from shares are fully tax deductible. In order to limit the benefit of these deductions, the tax-exemption method is, with some exemptions, limited to 97% for received dividends, and the remaining 3% is taxable for Norwegian corporate shareholders giving an effective tax rate of 0.72% (0.75% for certain entities within the financial sector). The 3% taxable income is calculated on dividends. Dividend distributions within a tax group (where the ultimate parent company directly or indirectly owns more than 90% of the shares and voting rights) are fully tax exempt. In addition, the tax-exemption method also applies for certain distributions from partnerships and, under certain conditions, to foreign-resident companies with taxable activity in Norway (3% of the income taxable at 24%/25%). However, distributions on hybrid instruments will not be tax exempt if the distribution is deductible for the distributing company.
Note that an investment in a company resident in a low-tax country in the EEA has to fulfil certain substance requirements to qualify for the tax-exemption rules. These requirements are intended to be in line with the substance requirements of the European Court of Justice’s (ECJ’s) decision in the Cadbury Schweppes case. A country is considered a low-tax country if the level of effective taxation is less than two-thirds of the tax that would have been due had the foreign company been resident in Norway. This is the same test used for the CFC regime (see the Group taxation section for more information).
However, for investments outside the EEA, the tax exemption rules apply only if a shareholder owns 10% or more of the share capital and the voting rights of the foreign company for a consecutive period of two or more years. To be able to deduct losses on the realisation of shareholdings outside the EEA, the shareholder and/or a related party may not own 10% or more of the share capital and the voting rights of the foreign company in a two-year period prior to the realisation. For dividends, the holding period of two years does not have to be met when dividends are distributed, but can also be met after the dividend date.
Shareholdings in low-tax countries outside of the EEA do not qualify for the tax-exemption rules. The Directorate of Taxes has published a non-exhaustive list of low-tax jurisdictions (black list) and non-low-tax jurisdictions (white list).
Acquisition and sales related costs (e.g. broker fees) must be added to the cost price of the shares for tax purposes. Costs incurred to manage acquired tax-exempt shares are, however, tax deductible.
Norway’s internal tax rules do not allow taxation of a non-resident’s capital gain on the disposal of financial instruments, including shares in Norwegian companies, unless the non-resident has a PE to which the financial instrument may be allocated.
Stock dividends (bonus shares) are not taxable on receipt, provided that the dividends have been distributed in accordance with the Limited Liability Company Acts and distributed in proportion with the ownership level of the shares.
Tax treatment of investments in security funds
As of 2016, new rules for taxation of investments in security funds apply. Formerly, the taxation of the unitholders depended on whether the fund was regarded as a mutual fund or a bond fund.
As of 2016, investments in security funds are taxed according to the same rules. The taxation of the investment in security funds will be determined by the share ratio in the fund. Distributions from security funds with a share interest between 20% and 80% will be split between dividend and interest income calculated on a pro rata basis based on the share interest in the fund. Furthermore, distributions from funds with more than 80% shares will only be taxed as dividends, and funds with less than 20% shares will only be taxed as interest.
In general, interest income is taxable on an accrual basis.
A Norwegian resident company is subject to CIT on its worldwide income. Double taxation of foreign-source income, including foreign-branch income and CFC income, is mitigated either through tax treaties or domestic tax provisions. A deduction for foreign tax may either be claimed as an expense or as a credit against Norwegian tax payable on that income. In most circumstances, foreign dividends are exempt according to the tax-exemption rules. As a consequence, foreign WHT may not be credited and constitute a real cost for the companies concerned.
Norway does not have any legislation for the deferral of tax on foreign income.