The Government’s proposal for the state budget for 2023

Already last week, the Government presented a proposal for significant tax increases for power producers and the aquaculture industry, which we have written more about here. The proposal for the national budget involves, among other things, increased income tax and additional employer’s contribution for wages over NOK 750,000, increased dividend tax and increased capital tax. At the same time, no changes are proposed to the expatriation tax, and the previous proposal on taxation of private consumption in companies is postponed.

Below, we review the main features of the proposal. A detailed overview of the tax rates and changes to them can be found here.

The proposal can be changed after negotiations in the Storting. We also expect more proposals for rule changes when the Tax Committee, which reviews the entire tax and excise system, will present its report on 16 December 2022.

1. Personal taxation

Income tax

The Government will reduce the income tax for people who earn less than NOK 750,000, and increase the tax for others.

Firstly, it is proposed that the personal allowance be increased from NOK 58,250 to NOK 73,100. This amounts to an increase of around 25%. The personal allowance is a deduction from taxable ordinary income (i.e. salary, net business income, capital income, etc.). The deduction shall contribute to redistribution.

Another deduction in ordinary income is the minimum deduction, which shall cover expenses for earning the income. Today, the minimum deduction amounts to 46% of total salary and social security, with a maximum level of NOK 109,950, and a minimum level of NOK 31,800 in wages and NOK 4,000 in pension. In order to simplify the minimum deduction, the Government proposes to abolish the lower amount limits.

Furthermore, the Government proposes to reduce the social security tax rate on salary/social security and business income by 0.1% in 2023, to 7.9 and 11.1% respectively.

With regard to the bracket tax, the Government is proposing certain changes in rates and activation threshold. In brackets 1 and 2, the rates are kept unchanged at 1.7% in bracket 1 and 4% in bracket 2. The activation thresholds are adjusted upward with wage growth, to NOK 198,350 in bracket 1, and to NOK 279,150 in bracket 2. The rates for higher incomes are proposed to be increased by 0.1%, corresponding to the reduction in social security tax on salary/social security and business income. This involves rates of 13.5% in bracket 3, 16.5% in bracket 4, and 17.5% in bracket 5. The activation threshold in bracket 3 is increased to NOK 644,700, while the activation threshold in brackets 4 and 5 is kept unchanged at NOK 969,200 and NOK 2,000,000 respectively.

Tax on share premiums and dividends

When taxing share premiums and dividends for personal shareholders, the amounts shall first be adjusted upwards by a factor number before it is taxed at 22% (i.e. dividend x factor number x 22%). The Government proposes that the factor number be increased from the current 1.6 to 1.72. This means that the tax rate for premiums and dividends will in reality be increased from 35.2% to 37.84%. The marginal tax including corporation tax will be 51.5%, which compared to today’s 49.5% means an increase in dividend tax of 2%. A corresponding increase in the upward adjustment factor is proposed in other provisions of the Tax Act.

The increase must be seen in the context of the Government proposing to increase the marginal tax on salary income. The tax rules must ensure neutrality between dividends and wages, so that it does not become more profitable for shareholders who work in their own company to withdraw employment income as dividends in order to save tax.

It is proposed that the changes to dividend tax should come into force immediately, with effect from today (6 October 2022).

Capital tax

In the state budget for 2022, the Government increased the capital tax rate from 0.85% to 0.95% for assets below NOK 20 million (bracket 1), and to 1.1% for assets over NOK 20 million (bracket 2). The Government is now proposing that the rate for bracket 1 be increased to 1%.

Furthermore, the Government proposes to increase the valuation of shares and commercial property from 75% to 80%. The valuation discount is thus reduced by 5%, to 20%. This comes after they increased the valuation of shares, operating assets and commercial property from 55% to 75% last year.

At the same time, it is now proposed to shield directly owned operating assets by reducing their valuation to 70%. The valuation discount is thus increased by 5%, to 30%. The differentiation in valuation is justified by the fact that taxpayers who conduct business through sole proprietorships in practice receive a less extensive valuation discount than those who conduct business through companies.

In the Solberg government’s proposal for the state budget for 2022, the valuation discount for shares was 50%. If the reduced discount, increased capital tax rates and increased dividend tax are taken into account, the capital tax for 2023 will increase by approx. 128% compared to the Solberg government’s proposal for the state budget for 2022.

No changes are proposed for bracket 2, the basic deduction or valuation of residential properties.

Amendment of the special rule for taxation of salary income during work stays abroad

According to the current regulations, people who have worked in at least 50% positions abroad for a period of 12 months can claim a reduction in Norwegian tax on salary income. A prerequisite is that the stay in Norway does not exceed six days per month on average (72 days per year). The provision has been interpreted and practiced so that in this calculation one looks at the entire period that the stay abroad lasts. In the event of a longer stay abroad, an employee could therefore stay in Norway for more than 72 days in one year, whereas the number of days in Norway is lower than 72 days in another year.

The Government now proposes that the number of days of stay in Norway should be calculated within each calendar year. This means that you can comply with the restriction one year, but not another year. The rule change gives less flexibility, and may involve practical problems for those who start a stay abroad at the end of the year - and plan to take a Christmas holiday in Norway. The right to extended stay in Norway due to unforeseeable conditions must also be calculated per calendar year.

For those who have exceeded the limit for permitted stay up to and including 2022, an opportunity is given to repair or reduce their stay in Norway during 2023, so that they come within the number of permitted days of stay.

2. Business taxation

Additional employer’s contribution on wages over NOK 750,000

The Government proposes to introduce a “situationally adapted” additional employer’s contribution of 5% on salaries over NOK 750,000. The fact that the rule is adapted to the situation indicates that the extra rate will apply for a limited period to reduce pressure in the labour market, but the period has not been specified. Similar arrangements have also been provided for shorter periods in the past.

It is this change that provides the greatest proceeds coverage, apart from the proposals on economic rent tax. A proceeds increase of NOK 7.7 billion is expected, which amounts to a third of what new/amended economic rent taxation will entail.

The additional employer’s contribution shall apply to all zones, including zones with a zero rate for employer’s contribution.

Cross-border reorganisations

According to Section 11-11 fourth, fifth and sixth subsections of the Taxes Act, certain forms of cross-border reorganisation can be carried out without taxation on specific terms.

Requirements for fiscal continuity abroad have been proposed to be removed. This means that it will be easier to carry out transactions across national borders. Previously, you had to go into the law of a foreign country to determine whether the transaction could be carried out with fiscal continuity. The condition has often proved difficult to fulfil in line with other countries’ internal legal rules, as some countries do not have rules on continuity. This has often led to transactions that it was initially desirable to facilitate through the rules triggering taxation in Norway.

The Ministry proposes that these come into force immediately, with effect from and including the income year 2022.

Reduction of the non-taxable income rate for the petroleum sector

In connection with the pandemic and the subsequent drop in oil prices, the Storting adopted temporary tax rules for the petroleum sector in June 2020. The Government is now proposing to reduce the non-taxable income rate from 17.69% to 12.4%. They refer to the rules having to be adapted to the fact that the profitability picture is now completely different from when the rules were introduced. The change comes into force with effect for expenses incurred from and including 1 January 2023.

Legislation of tax practice regarding the dating of contributions and compensation in agriculture

The Government proposes to legislate tax practices on the dating of contributions and compensation in agriculture. The proposal involves an exception to the realisation principle, in that income recognition of a one-off payment can be distributed for taxation over several years or postponed to a later year. The change is proposed with effect from and including the income year 2022.

3. Value added tax

General VAT obligation on the sale of remotely delivered services from abroad

Remotely deliverable services are services where the performance or delivery cannot, or is difficult to, be linked to a specific location due to the nature of the service. Examples are consulting and marketing services, as well as a number of electronic services.

The current rules mean that foreign providers of remotely delivered, non-electronic services to consumers are not liable to taxation. This gives the foreign providers a competitive advantage compared to Norwegian businesses.

The Government has therefore proposed to introduce a general VAT obligation on the sale of remotely delivered services from abroad to recipients in the Norwegian VAT area. It is the foreign provider who will be responsible for collecting VAT, and the Government believes that the current VOEC scheme can be used.

VAT for electric vehicles

Today, sales of vehicles that only use electricity for propulsion (electric cars) are exempt from VAT. Corresponding exemptions from value added tax are also granted for leasing electric cars and for sales of electric car batteries.

The Government announces that from 1 January 2023 they will introduce a limited VAT exemption on electric cars up to NOK 500,000. Amounts over NOK 500,000 must be invoiced with 25% VAT. The limited VAT exemption will also cover equipment that is part of the car, for example included navigation systems. In practical terms, the traders must split the purchase price into a taxable part and an exempt part. The scheme will also cover used electric cars that are imported into Norway.

The Government also announces that VAT will be introduced when leasing electric cars on the part of the purchase price that exceeds the exempt part. Special rules are therefore being introduced for determining the tax base for output tax for the part of the purchase price that exceeds the exempt part.

No VAT shall be calculated for leasing contracts entered into before 1 January 2023. A transitional arrangement will be established for leasing contracts where the electric car was delivered before 31 December 2022.

It is also notified that the scheme for the sale of electric car batteries is being discontinued.

Termination of the exemption for electronic news services

The Government wants to abolish the exemption from value added tax for electronic news services. Experience with the exemption shows that it is the TV distributors who benefit from the exemption, and not the media that produce news. The news industry can still use the exemption for newspapers, including electronic newspapers.

Changed dating of value added tax for building and construction activities and the shipbuilding industry

A scheme has been introduced with deferred payment of value added tax when the parties have a claim that is disputed. The current scheme has clear limitations in time, which means that after a while the performing contractor is obliged to pay VAT on the disputed claim.

The Government has submitted for consultation an alternative arrangement, with deferred dating of value added tax linked to claims that have their basis in manufacturing contracts. The aim is for the scheme to come into force from 1 January 2023.

4. Referred cases - cases in progress

The proposal on taxation of private consumption in companies will be adjusted, and will take effect from 2024

On 9 May this year, the Government put forward a proposal for taxation of private consumption in companies. The proposal involved taxation of owners with a decisive influence in limited liability companies or general partnerships, etc., who own or dispose of residential property, leisure property, boats, aircraft or helicopters. The consultation deadline expired on 1 August 2022. The proposal was wide, which was also taken up by the consultation memos. Many pointed out that there is a need for exceptional rules, particularly for companies that engage in rental activities.

In the proposal for the state budget for 2023, the Government writes that it will take time to review all the consultation responses and adjust the rules. No changes will therefore be proposed with effect from 1 January 2023, as was proposed in the consultation. An adjusted proposal will be presented in 2023, with the aim of coming into force in 2024. The Government also specifies that private consumption in companies must in any case be reported and taxed according to the current rules on withdrawals and dividends, and that private consumption in companies is a priority area for the Norwegian Tax Administration.

Follow-up of proposals for changes to the shipping company tax scheme

The Storting has previously requested the Government that businesses that qualify for shipping companies’ taxation should also be able to run other businesses that are not eligible for aid, and that should be taxed in the ordinary way. A proposal for such changes to the shipping company tax scheme was submitted for consultation in September 2021. We have explained the proposal in a previous article. The Ministry of Finance is now working on following up the consultation. They point out that the scheme requires ESA approval, and that a final legislative proposal should not be submitted until such approval is available.

Neutral VAT rules for electric car leasing

The Storting has also asked the Government for measures to increase the share of electric cars in the leasing market. The Government will submit a proposal for consultation and aims to put forward a proposal for rule changes in the Revised State Budget 2023 in the spring at the earliest.

Conversion tax on petroleum extraction and climate agreement

Furthermore, the Storting has asked the Government to prepare a climate agreement with the petroleum industry to reduce greenhouse gas emissions from Norwegian oil and gas production. In the budget settlement for 2022, the majority requested that SV’s proposal to introduce a conversion tax on oil and gas must be included as part of the investigation. The Ministry of Finance has found unfavourable aspects of the proposals, and will therefore not proceed with this.

The interaction of the NOKUS rules with withholding tax on interest and royalties etc.

The Storting has asked the Government to carry out a thorough evaluation of the current tax scheme for NOKUS companies, including also assessing how this scheme interacts with withholding tax.

The Ministry’s assessment is that it is not possible to carry out a thorough evaluation of the NOKUS rules during 2022. The whole is missing pending international developments in the area, and in particular the completion of the work on a two-pillar solution for the taxation of large multinational groups in Norway. The Ministry will therefore return to the Storting with an assessment of the NOKUS rules when the two-pillar solution has been introduced into Norwegian law.

Taxation of international groups and expatriation tax

The Government has also been asked to intensify work against international tax adjustments and tax evasion by implementing the necessary solutions and measures in the Norwegian tax system. The Storting asked the Government to investigate measures against profit shifting and erosion of the tax base, beyond the two-pillar solution. It is indicated that work on this is an ongoing process. The work must be continuously assessed against EEA law, which is under development in this area. The Ministry is also drawing up stricter rules for people who move out of Norway with unrealised share premiums.

The Tax Committee is expected to make assessments of these questions. The Government also writes that they consider this an important task and prioritise this work. Beyond this, no indication is given as to when any proposals will be made.

Property tax and actors with large property holdings

The Storting has asked the Government to investigate changes to the regulations for property tax, so that actors with large property holdings do not benefit disproportionately compared to ordinary homeowners. This probably has its background in the fact that property actors with many smaller units come under, or benefit greatly from, the basic deductions.

The Ministry of Finance finds no basis for proposing changes to the Property Tax Act’s rules on basic deductions now, and is awaiting any changes. It is pointed out that the taxation of residential property will form part of the Tax Committee’s investigation, and that the Government has started work on a separate housing notification.

Redistributive compensation for increased environmental taxes

The Storting also asked the Government to investigate a model for redistributive compensation for increased environmental taxes within the state budget for 2023. The Government has made a broad assessment of various measures. It is pointed out that climate charges have been proposed to be increased by 21% over and above the price increase. At the same time, further redistributive income tax is proposed, in the form of tax relief for taxpayers with income below NOK 750,000 and increases for high-income groups. Reference is also made to other more general effects of the budget. No further work will be undertaken in the request.

Voluntary sector and value added tax on circular value chains

The Storting wanted the Government to assess whether the current VAT rules for goods for the voluntary sector are too rigid or create barriers for circular value chains. This applies, for example, to the voluntary sector’s reuse of goods that would otherwise have been thrown away. The issues are being assessed by both the Norwegian Tax Directorate and the Tax Committee, so that changes can be expected as early as 2023.

Income from offshore wind and other renewable energy resources

It has long been recognised that, in the future, new activity will arise on the Norwegian continental shelf, including the extraction of seabed minerals and wind power. For companies that are tax-resident in Norway, the activity will be liable to tax according to the general rules in the Taxes Act, while foreign companies do not have a tax liability to Norway when the activity takes place outside Norwegian territorial borders at sea.

In February 2022, a proposal was therefore submitted for consultation to introduce tax liability for foreign persons and companies that participate in mineral activities, utilise renewable energy resources or carry out carbon management on the Norwegian continental shelf. After a closer assessment of the consultation statements, the Ministry plans to put forward proposals for rules during 2023, with effect for the income year 2024.