Statements clarify taxation of employee share schemes in Norway

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Statements clarify taxation of employee share schemes in Norway

Sponsored by

Sponsored_Firms_deloitte.png
Norway has issued two statements on the acquisition of shares by employees

Linda K Rollefsen and Lene Bergersen of Deloitte Norway explain two recent interpretative statements from the Norwegian Directorate of Taxes and discuss how they will affect the taxation of employee share incentive schemes.

On January 1 2022, the Norwegian Directorate of Taxes issued two statements regarding the acquisition of shares by employees. One of the statements addressed the question of whether shares were acquired at discount. The second included a tax assessment of an employee share incentive model.

The statements are connected and apply to situations where employees acquire shares for a lower price than the assumed market value. 

Background

The two statements were issued as a result of frequent enquiries from taxpayers seeking clarification on variants of the share incentive scheme that was accepted in the Kruse Smith judgment (Rt. 2000 p. 758). In the Kruse Smith judgment, the question was whether capital gains on shares acquired by employees could be taxed as salary income.

Put simply, the incentive scheme allowed employees to acquire shares at the par value, which was significantly lower than the equity value per share (NOK 10 ($1.12) compared to NOK 143). It was agreed that the difference between the par value and the equity value (NOK 133) was to be deducted from the consideration when the shares were sold later.

The Supreme Court regarded the difference as a form of interest free loan, rather than a discount that could be taxed as salary income. In contrast to a regular loan, however, the employees were not obliged to repay the entire amount if the share value fell below NOK 133 (i.e. the obligation to repay the loan was not unconditional).

Although the credit was not formally granted, the court considered that such a commitment arose as a consequence of the way in which the redemption amount of the shares had been determined.

The two statements

In the first statement, the Directorate of Taxes examined typical cases where no formal loan is granted, but employees are allowed to buy a certain percentage of the shares in the company at e.g. 20% of booked equity in exchange for the shares later having to be sold at the same discount. In the example, the market value of the shares is five times higher than the booked equity. As the employees acquire ordinary shares, the employees also have the right to 10% of the dividends in the company.

In its assessment, the Directorate asked whether an independent buyer would have paid more to acquire the shares. The Directorate pointed out that the sale clause (to sell at a discount) in such an arrangement would have a downward effect on the price in a third-party transaction, while the possibility of receiving dividends would have an upward effect on the price.

On the basis that the pricing mechanism considered the expected yield on the shares only to a limited extent, if at all, the Directorate concluded that a taxable discount would exist at the time of the acquisition of the shares, deemed to be salary income. However, subsequent returns and value developments would follow the tax rules on capital gains and losses.

The second statement examined the criteria for a reduced purchase price to be regarded as a loan rather than a taxable discount. As a requirement, the Directorate stated that the loan must be “genuine”. To meet this requirement, formalities (such as the name of the arrangement) are of no importance. The key is that the employee has an unconditional obligation to repay the loan.

With reference to judgments including Vryobloed (Rt. 1998 p. 383), the Directorate stated that a loan would not be genuine if the obligation to repay is dependent on the economic development of the company. Consequently, the loan would not be regarded as genuine in cases where it would be partly forgiven because the sale price of the shares does not cover the entire loan.

This is a stricter requirement compared to the one set out by the Supreme Court in the Kruse Smith judgment. In cases where a loan is considered ‘genuine’, and the loan is later forgiven, the debt forgiveness would be regarded a taxable benefit (without affecting the original purchase). 

Consequences

Based on these two statements, our view is that it will become more challenging to use and support the Kruse Smith model. 

These statements also tie in with other recent changes that are detrimental to certain advantages previously available to employees, such as the possibility to buy certain shares at a small discount without the benefit of being subject to taxation and a simplified valuation approach to non-listed shares.

Linda Kristin RollefsenAssociate, Deloitte NorwayE: lrollefsen@deloitte.no 

Lene BergersenAssociate, Deloitte NorwayE: lebergersen@deloitte.no 

more across site & bottom lb ros

More from across our site

PwC has taken the ‘remarkable position’ that a former partner was singularly responsible for its tax leaks scandal; in other news, Forvis Mazars unveiled its next UK CEO
Luxembourg saw the highest increase in tax-to-GDP ratio out of OECD countries in 2023, according to the organisation’s new Revenue Statistics report
Ryan’s VAT practice leader for Europe tells ITR about promoting kindness, playing the violincello and why tax being boring is a ‘ridiculous’ idea
Technology is on the way to relieve tax advisers tired by onerous pillar two preparations, says Russell Gammon of Tax Systems
A high number of granted APAs demonstrates the Italian tax authorities' commitment to resolving TP issues proactively, experts say
Malta risks ceding tax revenues to jurisdictions that adopt the global minimum tax sooner, the IMF said
The UK and what has been dubbed its ‘second empire’ have been found to be responsible for 26% of all countries’ tax losses by the Tax Justice Network
Ireland offers more than just its competitive corporate tax environment but a reduction in the US rate under a Trump administration could affect the country, experts tell ITR
The ‘big four’ firm was originally prohibited from tendering for government work until December 1 due to its tax leaks scandal, but ongoing investigations into the matter have seen the date extended
Approximately 74% of MAP cases in 2023 reached a full resolution, but new transfer pricing MAP cases fell by 16%
Gift this article