Norway, like many other countries, has implemented rules to prevent tax avoidance through the use of controlled foreign companies (CFCs) in low-tax jurisdictions. These rules, known as NOKUS (Norskkontrollert Utenlandsk Selskap) rules, are designed to ensure that Norwegian taxpayers cannot defer or avoid taxation by accumulating profits in foreign entities. This article will provide an in-depth analysis of the NOKUS rules based on the Norwegian Tax Act.
1. Introduction to NOKUS Rules
The NOKUS rules, found in Sections 10-60 to 10-68 of the Norwegian Tax Act, allow for the taxation of Norwegian-controlled foreign companies and other entities located in low-tax countries. Under these rules, Norwegian shareholders can be taxed on their proportionate share of the company's profits, regardless of whether these profits are actually distributed.
The primary objective of the NOKUS rules is to prevent tax-motivated capital flight and to ensure a degree of capital export neutrality. This approach aims to align the tax treatment of foreign investments with domestic investments in Norway.
2. Scope of Application
The NOKUS rules apply to Norwegian-controlled companies and other independent entities or assets in low-tax countries. The key elements that determine the applicability of these rules are:
a) Norwegian Control: The foreign entity must be controlled by Norwegian taxpayers.
b) Low-Tax Country: The entity must be resident in a country where the effective tax rate is less than two-thirds of the Norwegian tax rate.
c) Type of Entity: The rules apply to limited liability companies and similar entities, as well as other independent entities or assets.
3. Norwegian Control
Control is typically established when Norwegian taxpayers own or control at least 50% of the shares or capital in the foreign entity at both the beginning and end of the income year. The control requirement can be met through direct or indirect ownership, with no need for cooperation between the Norwegian owners.
The law also considers control through other means, such as having the right to elect board members or having significant influence over the entity's decision-making process. In some cases, negative control may also be considered in the overall assessment.
4. Low-Tax Country Definition
A country is considered a low-tax country if the effective tax rate on the entity's total profits is less than two-thirds of the tax that would have been levied if the entity were resident in Norway. This comparison is based on effective tax rates rather than nominal rates or actual taxes paid.
The assessment involves a comprehensive evaluation of the tax rules applicable to the specific type of entity in question. Factors considered include special tax regimes, differences in deduction rules, variations in depreciation rates, and tax incentives.
The Norwegian tax authorities maintain a "white list" of countries not considered low-tax countries and a "black list" of countries considered low-tax countries. However, these lists are subject to certain limitations and exceptions.
5. Calculation of Taxable Income
When NOKUS rules apply, the Norwegian shareholders are taxed on their proportionate share of the entity's profits, calculated according to Norwegian tax rules. This involves:
a) Converting the entity's financial statements to comply with Norwegian tax principles
b) Adjusting for differences in accounting and tax rules
c) Converting amounts to Norwegian kroner
The taxable income is calculated as if the foreign entity were a Norwegian taxpayer, using a net method similar to the approach used for partnerships in Norway.
6. Loss Carry Forward
Losses incurred by a NOKUS entity can only be carried forward to offset future profits from the same entity. These losses cannot be used to offset other income of the Norwegian shareholder. To utilize loss carry forward, shareholders must provide a declaration to the tax authorities stating that all underlying documentation for the entity's accounts will be made available upon request.
7. Foreign Tax Credit
To prevent double taxation, Norwegian shareholders can claim a credit for taxes paid by the NOKUS entity in its home country or in third countries. This credit is limited to the Norwegian tax on the same income and operates on a per-country basis, with NOKUS income forming its own category.
8. Exemptions from NOKUS Rules
There are two significant exemptions from the application of NOKUS rules:
a) Treaty Country Exemption: NOKUS rules do not apply to entities resident in countries with which Norway has a tax treaty, provided that the entity's income is not mainly of a passive nature.
b) EEA Exemption: Entities established within the European Economic Area (EEA) are exempt from NOKUS rules if they are genuinely established and carry out real economic activities in the EEA country.
9. Dividend and Capital Gain Taxation
The interaction between NOKUS rules and the taxation of dividends and capital gains is complex:
a) Corporate Shareholders: Dividends received from a NOKUS entity are generally tax-exempt to the extent they represent previously taxed NOKUS income. Capital gains on the sale of NOKUS shares are adjusted to account for previously taxed income.
b) Individual Shareholders: Individual shareholders are subject to both NOKUS taxation and dividend taxation. However, only 78% of dividends from a NOKUS entity are considered taxable income, adjusted by a factor of 1.44, to align the overall tax burden with that of dividends from Norwegian companies.
10. Establishment and Cessation of Norwegian Control
If a company becomes Norwegian-controlled during an income year, the participants are subject to NOKUS taxation for the entire year. Cessation of Norwegian control triggers an obligation for Norwegian participants to perform a gain settlement on assets and liabilities according to the rules on exit tax.
11. Special Considerations for Holding Companies and Shipping Companies
The NOKUS rules have specific implications for holding companies and shipping companies:
a) Holding Companies: The assessment of whether a holding company is in a low-tax country may depend on the types of income it receives, such as dividends or capital gains.
b) Shipping Companies: The comparison norm for foreign shipping companies is the special Norwegian shipping tax regime, not the ordinary corporate tax rules.
Conclusion
The NOKUS rules form a crucial part of Norway's international tax framework, aiming to prevent tax avoidance through the use of low-tax jurisdictions. While these rules serve an important purpose in maintaining the integrity of the tax system, they also present significant complexities for Norwegian taxpayers with international investments.
The rules require careful navigation, balancing the need for effective anti-avoidance measures with the realities of global business operations. As the international tax landscape continues to evolve, it is likely that the NOKUS rules will undergo further refinements to address new challenges and align with global standards.
Norwegian taxpayers with investments in foreign entities should carefully consider the implications of these rules and seek professional advice to ensure compliance and optimal tax planning. As always, transparency and proper documentation are key to managing the tax risks associated with international investments under the NOKUS regime.