Norway

Implementation of Pillar Two in Norway

On 24 November 2023, the Norwegian Ministry of Finance presented a new Norwegian Act for the Pillar Two Income Inclusion Rule (IIR) and Domestic Minimum Top-up Tax (DMTT). The Act will more or less ’mirror‘ the Organisation for Economic Co-operation and Development (OECD) model rules and will be implemented from 1 January 2024. The new law proposal does not include the implementation of the Undertaxed Profits Rule (UTPR), but the adoption of the rule in Norway is expected from 2025.

Proposed changes for securities funds

Under current rules, securities funds that emigrate from Norway in connection with a merger may trigger tax, called ’exit tax‘, on gains from shares the fund owns in companies outside the European Economic Area (EEA). Shares within the European Economic Area can be transferred tax-free in the merger.

The proposed amendment will grant tax-exempt status to Norwegian-domiciled securities funds for shares owned outside the European Economic Area when they relocate. Consequently, shares that fall under the participation exemption method within the European Economic Area, as well as those held outside of it, will not incur any tax liabilities upon relocation.

Onshore wind power taxation

As of 1 January 2024, Norway has introduced resource rent tax on onshore wind power production. This entails that net income from the production of wind power will be taxable both at the ordinary 22% corporate income tax (CIT) rate and, in addition, at a 25% effective rate of resource rent tax (effective marginal tax rate of 47%).

The income computation for the resource rent tax is based on the existing hydropower regime. As a main rule, the gross resource rent income is determined as spot market prices per hour x actual power production. The actual power prices obtained will, however, be recognised, inter alia, where the power is sold pursuant to existing power purchase agreements (PPAs) concluded with unrelated parties before 28 September 2022 or PPAs concluded with unrelated parties after 28 September 2022 that satisfy certain conditions. In addition, the gross resource rent will include income from the sale of electricity certificates and guarantees of origin.

Deductions in the resource rent income are granted, notably, for ordinary operating expenses, capital expenditure (with separate rules for historical and future investments, cf. below), real property taxes, and a simulated CIT calculated on the activity that is subject to resource rent tax. Financing costs are non-deductible in the resource rent.

Deductions for capital expenditure are subject to separate rules for historical and future investments in onshore wind power assets. While future investments are fully deductible in the year of investment (cash flow taxation), historical investments are subject to transitional rules for calculating the tax values upon entry into the new regime and annual depreciation.

For existing wind farms, negative resource rent income may be carried forward with a risk-free interest. For new wind farms, the tax value of negative resource rent income will be paid out to the taxpayer subject to the Norwegian tax authorities having controlled the tax assessment (subject to approval from the European Free Trade Association [EFTA] Surveillance Authority before taking effect).

In addition, as of 1 January 2024, onshore wind power is subject to a production tax (excise duty) levied at a rate of 0.023 Norwegian kroner (NOK) per kilowatt-hour (kWh) of electricity produced.

Resource rent tax on aquaculture

Resource rent tax on aquaculture was introduced in September 2022 with effect from 1 January 2023 and approved by Parliament on 31 May 2023. The effective tax rate of 25% applies to the production of salmon, trout, and rainbow trout in the sea phase, and implies a marginal tax rate of 47%. A tax-free allowance of NOK 70 million is granted at the corporate group level, making the smallest companies exempt from the resource rent taxation. The group definition includes companies with decisive influence over another enterprise by agreement as well as companies owned by related-party individuals. The tax-free allowance of NOK 70 million must be adjusted by the CIT rate of 22%, resulting in a net allowance of NOK 54.6 million.

The resource rent tax is structured as a cash-flow tax, meaning revenues and costs are included in the tax basis in the year in which they are earned or incurred. Revenues are based on the market value of the fish at the time the fish are removed from the cages. From July 2024, an independent price board will be established to determine the market value/taxable income based on extensive reporting by the companies. For 2023, and the first six months of 2024, companies are responsible for determining the market values themselves. 

Companies subject to the resource rent tax can immediately deduct investments used exclusively during the sea phase. Deductions for investments made prior to 1 January 2023 are granted through deprecation of remaining tax values. Accordingly, there is no step-up in tax basis or other compensation for historical investments according to the tax authorities, but this is expected to be challenged by taxpayers.

Negative resource rent income can be carried forward with interest and deducted from positive calculated resource rent income in subsequent years. The tax-free allowance cannot be used to generate a loss. If activities cease, the tax value of the negative resource rent will be disbursed. 

No deductions are granted for the value of fish farming licences, but a stipulated deduction is permitted for licences purchased at auction in 2018/2020 and allocated at fixed prices in 2020. The deduction is set at 40% of the actual remuneration paid to the central government divided over five years.