Inventory is valued at cost or the production value for goods produced by the taxpayer, including goods produced to order. 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. Tax deduction for loss of value is only permitted on disposal.
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 (participation) exemption for corporate shareholders
Under the participation exemption rules, corporate shareholders are generally exempt from tax on dividends received, on capital gains from qualifying shares, and on derivatives where the underlying object is qualifying shares. Correspondingly, corporate losses on qualifying shares are non-deductible.
All operating expenses related to exempt income from shares (e.g. management costs) are fully tax deductible. Dividends received only fall under the participation exemption for 97% of the received value, with the remaining 3% taxable at the standard corporate rate of 22%, providing for an effective tax rate of 0.66%. 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, however, fully tax exempt, reflecting that an alternative in many cases would be a tax neutral group contribution.
The 100% exemption is also applicable for dividends received from qualifying EU/EEA companies provided that the ownership requirement is fulfilled.
In addition, the participation exemption rule applies for certain distributions from partnerships and, under certain conditions, to foreign-resident companies with taxable activity in Norway. 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 within 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 only apply 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 at any point 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 participation-exemption rules. The Directorate of Taxes has published a non-exhaustive list of de facto 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 basis of the shares for tax purposes. Costs incurred to manage acquired tax-exempt shares are, however, tax deductible.
Norway’s domestic 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 mutual funds
The taxation of investments in mutual funds will be determined by the proportion of shares in the fund. Distributions from mutual funds with a share proportion between 20% and 80% will be split between dividend and interest income on a pro rata basis. 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.
In general, royalty 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 cases, foreign dividends are exempt according to the participation exemption rules. As a consequence, foreign WHT may not be credited and constitutes a real cost for the companies concerned.