Holding Norwegian real estate

DIRECT HOLDING OF REAL ESTATE

This section discusses the most important tax implications of the direct holding of real estate. Firstly, the impact for resident individuals and non-resident individuals. Thereafter, the impact for resident companies and non-resident companies.

Resident individuals

Personal income tax

lncome derived from real estate, such as rental income, is subject to individual income tax. Rental income can either be taxed as business income of a sole proprietorship with a progressive tax rate between 33.2% and 50.6%, or as capital income at a flat tax rate of 22%. However, as a rule of thumb, the income generated by renting out more than 500 sqm of commercial property or more than 4 apartments qualifies as business income.
 

Wealth tax

Resident individuals are subject to wealth tax on the value of the real estate.
 

Deductibility of costs

Costs incurred to acquire, maintain or safeguard taxable income are deductible. This applies to operating costs, maintenance costs, deprecation on operating assets, interest expenses (limited deductibility for interests paid to related parties), etc.

For tax purposes, operating assets are capitalised and depreciated according to set rates. When acquiring real estate, the purchase price needs to be allocated between building, technical facilities, and land. Depreciation of buildings can take place on an annual basis, with a depreciation rate of 2%, 4%, 6%, 10% or 20%, depending on the type of real estate. In addition, technical facilities integrated in the building can be depreciated 10% annually. The tax book value on both buildings and technical facilities are generally based on the acquisition costs, with the addition of any improvement costs. However, land cannot be depreciated.

Maintenance costs or repairs are deductible in the year they occur. In general, costs are regarded as maintenance for tax purposes when the intention is to restore or return the deteriorated property back to its original efficient condition.  On the other hand, if the outcome of the construction work is a betterment or an adaption, then the costs will, as a main rule, have to be capitalized and depreciated. 

Losses on the realisation of assets are tax-deductible for both individuals and companies. Deductions are also allowed for losses relating to a company's business activities, including accounts receivable. No deductions are allowed for losses on shares or units covered by the participation exemption method.

No deductions are allowed for debts related to the financing of related parties. 

Losses - carry forward

Net losses/deficit resulting from costs and/or depreciations exceeding the revenue (rental income) on the investment property, may be carried forward indefinitely for tax purposes.
 

Value Added Tax

Businesses liable to VAT are entitled to deduct VAT on costs related to the construction and/or maintenance of immovable property which is for use within the VAT liable business. For a partly VAT liable business, there is a proportional right to deduct input VAT. If the non-tax portion is a minimal portion of the overall revenue (less than 5%), the business is fully entitled to deduct the input VAT of the entire cost. 

Non-resident individuals

Non-resident individuals are treated in the same manner as resident individuals. However, non-resident individuals are not subject to wealth tax.
 

Resident companies

Corporate income tax

Revenue derived from real estate, such as rental income, is subject to corporate income tax at a flat tax rate of 22%.
In line with the principle of worldwide income, all income derived from Norwegian real estate is essentially deemed to be taxable income in Norway. This includes rental income, interest and profits on the realisation of assets. An important exception applies under the participation exemption method, whereas companies owning shares or units are exempted from paying tax on profits or dividends from shares or units, subject to certain conditions. However, the participation exemption method is not applicable to the direct holding of real estate.

Deductibility of costs

Costs incurred to acquire, maintain or safeguard taxable income are deductible (for both individuals and companies). This applies to operating costs, maintenance costs, deprecation on operating assets, interest expenses (limited deductibility for interests paid to related parties), etc.

For tax purposes, operating assets are capitalised and depreciated according to set rates. When acquiring real estate, the purchase price needs to be allocated between building, technical facilities, and land. Depreciation of buildings can take place on an annual basis, with a depreciation rate of 2%, 4%, 6%, 10% or 20%, depending on the type of real estate. In addition, technical facilities integrated in the building can be depreciated 10% annually. The tax book value on both buildings and technical facilities are generally based on the acquisition costs, with the addition of any improvement costs. However, land cannot be depreciated.

Maintenance costs or repairs are deductible in the year they occur. In general, costs are regarded as maintenance for tax purposes when the intention is to restore or return the deteriorated property back to its original efficient condition. On the other hand, if the outcome of the construction work is a betterment or an adaption, then the costs will, as a main rule, have to be capitalized and depreciated. 

Losses on the realisation of assets are tax-deductible for both individuals and companies. Deductions are also allowed for losses relating to a company's business activities, including accounts receivable. No deductions are allowed for losses on shares or units covered by the participation exemption method.

No deductions are allowed for debts related to the financing of related parties.

Interest limitation rules

Norway has rules for the limitation of deduction on interest. The current rules limit the deduction of interests paid to related parties and on liabilities to specific external borrowers ('back-to-back loan'), in addition to any liabilities the related parties have provided security for. This is applicable if the net interest for the company exceeds NOK 5 million in one year.

For group companies interest limitation rules also apply for liabilities to independent third parties, if the total net interest in the group exceeds NOK 25 million in one year. A group ratio rule applies in order to prevent ordinary liabilities being affected by the interest limitation rules, so that no interest deduction will be limited if the equity ratio at Norwegian group level is higher or similar to the equity ratio of the worldwide group.

Fiscal Unit/ Tax-consolidation group

In Norway, group of companies are taxed as independent taxable entities. They are not taxed on a consolidated basis. Instead, there are rules governing group contributions. Companies within a group may give group contributions to each other with immediate tax effect. Group contributions are deductible for the contributor and taxable for the recipient. Rules have also been issued regarding intra­group transfers to the effect that assets may be transferred in return for compensation without triggering any tax liability.

An ownership threshold greater than 90% is required, in order to qualify for group contributions and intra-group transfers.

Losses- carry forward

Net losses/deficit resulting from costs and/or depreciations exceeding the revenue (rental income) on the investment property, may be carried forward indefinitely for tax purposes.

However, if a Norwegian company cease its business/operations and choose to change its ownership, carry­forward losses may be denied. The same may apply if the carry-forward losses are the main reason for the change of ownership, and it may also apply to other tax positions.

Value Added Tax

Businesses liable to VAT are entitled to deduct VAT on costs related to the construction and/or maintenance of immovable property which is for use within the VAT liable business. For a partly VAT liable business, there is a proportional right to deduct input VAT. If the non-tax portion is a minimal portion of the overall revenue (less than 5%), the business is fully entitled to deduct the input VAT of the entire cost. 

Non-resident companies

Non-resident companies are treated in the same manner as resident companies.

INDIRECT HOLDING OF REAL ESTATE

This section discusses the most important tax implications of the indirect (shares) holding of real estate. Firstly, the impact for resident individuals and non-resident individuals. Thereafter, the impact for resident companies and non-resident companies.

Resident individuals

Personal income tax

lncome derived from shares, either as dividends or upon realisation, is taxed as capital income at a flat tax rate of 22% multiplied by 1.72, giving 37.84% as the effective tax rate.

Deductibility of costs, interest payments and depreciation

Interest costs on loans related to shares are deductible from the tax base cost with a 22% tax rate.

Losses

Losses from the sale or disposal of shares are deductible for tax purposes and may be carried forward indefinitely. Tax losses on shares are multiplied by 1.72 and deducted from the tax base cost with 22% tax rate, giving 37.84% effective tax deduction.

Non-resident individuals

The taxation of non-resident individuals is dependent on the tax treaty with the resident country and dividends are as a main rule subject to withholding tax. Losses can only be offset against other Norwegian taxable income. Norwegian interest costs on loans related to shares are as a main rule deductible.

Non-resident individuals are not subject to wealth tax.

Resident companies

Corporate income tax

Business income is subject to corporate income tax at a flat tax rate of 22%.                   
      
However, according to the participation exemption method, companies owning shares or units are exempted from paying tax on profits or dividends from shares or units, subject to certain conditions.

Deductibility of costs, interest payments and depreciation

Costs and losses related to shares or units covered by the participation exemption method are not deductible. However, interest costs on loans related to shares are deductible.

Anti-tax avoidance directive

Norway is not committed to the EU anti-tax avoidance directive but is implementing similar rules through the OECD BEPS project.

Non-resident companies

The taxation of non-resident companies is dependent on the tax treaty with the resident country, and whether the company is resident within or outside the EU. Companies without residence within the EU are as a main rule subject to withholding tax. Losses can only be offset against other Norwegian taxable income. Norwegian interest costs on loans related to shares are as a main rule deductible.