Investor taxation will depend on whether the partnership is considered tax-transparent or not for Norwegian tax purposes.
If the partnership is tax-transparent, the investors are taxed on an annual basis for their proportionate share of the fund income. Norwegian investors are taxable for income from both Norwegian and foreign based partnerships. Foreign investors are taxable to Norway for income derived from Norwegian-based partnerships.
The partnership investors will have to file Norwegian tax returns that include their share of the partnership’s profit or loss.
Tax classification:
A partnership carrying out economic activities will be considered transparent if at least one of the partners has personal unlimited liability for the fund's obligations and the fund's activities are conducted for two or more of the partners' joint expense and risk.
The assessment of the “personal unlimited liability” criterion will usually relate to the general partner. This condition will usually be fulfilled if the general partner is considered personally liable for the partnership's obligations under the relevant partnership agreement and the domestic law in the partnership's country of registration.
The “joint expense and risk” condition usually means that the general partner must be entitled to a sufficient financial interest. This could be either by having an ownership share in the partnership and thus taking part in its profits and losses like other investors and/or being entitled to carried interest.
The Norwegian tax authorities consider a general partner as having sufficient financial interest in the partnership when having an ownership interest of 0.1% or more, and/or if it is entitled to a share of the partnership's profits in excess of its ownership interest (e.g. carried interest).
Should the conditions above not be met the foreign partnership will be qualified as an opaque entity.
Taxation of the partnership’s income:
If the partnership is considered transparent for Norwegian tax purposes, the investor is taxed on an annual basis for their proportionate share of the partnership’s net income. The taxable income is calculated at partnership level and based on Norwegian tax rules as if it was a Norwegian tax resident. The partnership investments need to be assessed to determine the taxable income that is allocated to the investors for the annual taxation.
The investor is allocated their proportionate share based on ownership percentage. Taxation of the annual profit share applies regardless of actual distributions made from the partnership to the investor. The income is taxed at 22%. But if the partnership income qualifies under the Norwegian participation exemption method it would essentially be tax exempt.
Under the participation exemption method, dividends and realised gains on shares in corporations within the EU/EEA are tax exempt. Losses are not deductible. If the dividend or realised gain relates to a corporation in a low tax jurisdiction within the EU/EEA there is also a substance requirement.
Dividends and realised gains on shares in corporations outside the EU/EEA are tax exempt if the partnership held at least 10% of the shares (both capital and voting rights) for at least two years. Dividends qualify if distributed during this period, while capital gains qualify if earned at the end of the period. Losses are not deductible if the partnership at any time during the two-year period held more than 10% of such shares. Three percent of the tax-exempt dividend is recognised as taxable income (with an effective tax rate of 0.66%). Dividends from corporations in low tax jurisdictions outside the EU/EEA are always taxable.
Net losses must be offset against future partnership income or capital gains upon disposal of partnership interests.
Upon sale of partnership interests, the profit or loss attributable to those interests is allocated between the buyer and seller based on actual ownership months in the sales year. The month of transfer is allocated to the buyer.
Taxation of distributions from the partnership
Repayment of invested capital is not subject to Norwegian taxation for the partnership investors. Distribution of excess profits is subject to an effective tax rate of 0.66% for corporate investors and 37.84% for individual investors.
Taxation of realisation of partnership interests:
Realisation of a partnership interest is, as a rule, tax-exempt under the participation exemption method for a corporate investor. However, realised gains are taxable at a 22% tax rate if the value of shares (that do not qualify under the participation exemption) at any time during the two-year period prior to realisation exceed 10% of the partnership’s total value of shares. Realised loss is only tax-deductible if the value of disqualifying shares exceeds 10% consecutively over the two-year period prior to the realisation. For personal investors, realised gain or loss is taxable at 37.84%.
Exit tax
If a Norwegian investor sells partnership interests in a foreign partnership to a foreign investor, the underlying partnership assets may, if certain conditions are met, be subject to exit taxation.
Opaque foreign entities
If a foreign partnership is considered opaque from a Norwegian tax perspective, the Norwegian investors are only taxed for actual distributions and/or realisation of the ownership interest. For Norwegian corporate investors, the income would be tax exempt if it qualifies under the Norwegian participation exemption method (but 3% income recognition of exempted dividends), whilst individual investors are taxed at 37.84%.