The tax exemption method - Should you become subject to it?

How may the Norwegian tax rules affect the preparation of M&A negotiations? And why should all profitable companies held by individual shareholders consider a tax-free restructuring?

The rule regarding Norwegian taxation of share gains and dividends 

In Norway, the corporate tax rate as well as the general tax rate is 22 per cent. However, certain special rules apply to income deriving from shares.
Qualifying corporate shareholders are exempted from tax on dividends (the rate is up to 0.66 per cent) and gains deriving from qualifying shares in Norwegian and foreign companies. In other words, a Norwegian company does not have to retrieve withholding tax from dividends distributed to a qualifying corporate shareholder duly established within the European Economic Area ("EEA").
On the other hand, individual shareholders tax resident in Norway are taxable at a rate of 31.68 per cent on gains and dividends deriving from shares. Dividends distributed to individuals tax resident abroad are subject to withholding tax calculated in accordance with the applicable tax treaty.
 
Why is it crucial for a seller to hold Target indirectly?
For a Norwegian individual shareholder, the tax payable is 31.68 per cent of the gain from a direct sale of shares. This rule applies even if the seller controls the acquiring company. Luckily, there are ways to make a restructuring tax exempt. Before gaining capital by selling a privately held company, individual sellers should consider tax planning in terms of re-organising their holdings. 
 
Why should individual shareholders generally consider achieving tax exemption for share dividends? 
The Norwegian tax on dividends distributed to a corporate shareholder resident within the EEA is not exceeding 0.66 per cent. On the other hand, a physical shareholder pays up to 31.68 per cent tax on dividends received (exceeding a risk-free shield for individuals resident within the EEC). (The withholding tax on dividends distributed to individuals resident abroad is 25 per cent and may be limited through tax treaty).
 
A consequence of the deviating taxation is that companies held solely or partly of individuals resident in Norway or abroad, may experience reluctance related to the distribution of dividends.

 

Conclusion

Prior to a potential sale of shares, Norwegian Targets held by individual shareholders should consider a tax-free restructuring in order for them to becoming corporate shareholders. A Buyer may bring this upside to the table as part of the initial contact.

In any case, Norwegian profitable companies held by both corporations and individuals (tax resident in Norway or abroad) should consider a tax-free restructuring in order to prevent tax mismatch between corporate shareholders and individual shareholders.

Executed correctly, such restructuring may be conducted without triggering any taxation. Such tax exempt merger and/or de-merger is only a formal decision and in many cases, even valuation is not necessary.

 

Due to e.g. creditor notice periods, a tax-free restructuring is normally time consuming and a typical process may last for several months. Should you consider selling your company during the coming years, it is advisable to commence the initial tax planning as early as possible. 

 

Tax & Legal Law firm provides advice and execution with respect to corporate re-structuring.

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