Structuring and financing your Norwegian acquisition

By Arne Didrik Kjørnæs; Geir Sviggum and Tormod Ludvik Nilsen, Wikborg Rein
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In this article we take at look at how to structure an acquisition in Norway. We will also discuss how to finance it, look at important tax issues, and how to optimise repayment of the investment.

Equity requirements

An acquisition of a Norwegian business may be conducted directly from a foreign enterprise or through a Norwegian special purpose vehicle (SPV). The SPV may be a limited liability company, a limited partnership or a partnership without limitation for its partners. A Chinese investor may finance the SPV by equity and/or loans from the parent company, by a combination of equity from the parent company and loans from other financial sources, or with equity from the parent company and loans from both the parent company and other financial sources. In many cases, a Norwegian SPV is financed by equity, as well as subordinated loans from the parent company and secured loans from other financial sources, with the shares in the target as collateral.

Arne Didrik Kjørnæs, Senior Partner, Wikborg Rein Oslo
Arne Didrik Kjørnæs
Senior Partner
Wikborg Rein

Under Norwegian legislation there is a requirement of reasonable equity compared with the activities of the enterprise in question and risks involved. Subordinated loans may reduce the requirement of equity. If a company does not have reasonable equity, this may influence the right of limitation of liability, tax considerations (related to payment of interests on loans versus dividend) as well as liability for board members for loss creditors may suffer.

“Thin capitalisation” of the SPV may cause problems in many respects, including a requirement to stop the activities and liquidate the company. The correct mix of equity and loans is therefore an important factor to consider when investing in Norway. The correct mix should be evaluated in each case, based on the activities of the company, how the company is expected to finance repayment of debt including interest, as well as the risks involved. As a general comment, equity below approximately 20% may cause difficulties.

Repayment of investment

An important factor when investing is repayment of the investment. Distributing dividends on equity is subject to tax when distributed from Norway to China, but dividends paid to corporate shareholders in the EU and EEA (European Economic Area) are exempted from tax on dividend. Other EU/EEA countries may not tax dividends paid from that country to China. Thus, establishing a Norwegian SPV with a non-Norwegian EU/EEA holding SPV may be a feasible way for optimising the structure for tax purposes.

You should have in mind that Norwegian tax legislation (in order to be able to use the exempt method) as well as legislation in many EU/EEA countries requires a presence in that country by way of an office and employees.

Interest paid under a loan agreement is tax deductible for the borrower, and is not subject to withholding tax under Norwegian tax law.

As mentioned in an earlier article, transfers of capital to and from Norway are not subject to prior government approval. This includes payment of dividends as well as payment of interest. However, all payments to and from Norway shall be registered with the Norwegian Currency Register. Registration is made by the entity performing the transaction (normally a bank or a financial institution).

There are restrictions under Norwegian law related to financial assistance from the target company in financing the acquisition of shares issued by the target company. Distribution of dividends to the acquirer after the acquisition will be allowed, subject to the general restrictions on payment of dividends from any company under Norwegian legislation.

Transactions between the target and the acquirer must be on an arm’s length basis, i.e. based on normal business conditions. This will include the interest rate on loans from the acquirer (too high interest rates may be considered as dividend subject to restrictions), sale of assets on abnormal terms etc.

Tax factor

Tax is an important factor when making an investment. The corporate tax rate in Norway is 28%. When comparing effective tax rates in Europe, Norway’s rate is about average. The tax system is more or less neutral, in that there is no difference in effective tax rates between different business sectors (an important exemption is shipping, where shipping income is exempt from corporate tax and instead pays a nominal tonnage tax).

Geir Sviggum, Partner, Wikborg Rein, Shanghai
Geir Sviggum
Wikborg Rein

Distributing profits from Norway by way of dividends will trigger up to 25% withholding tax. Norway does not levy withholding tax on interest and royalties. The withholding tax rate on dividends is reduced under the more than 80 tax treaties Norway has in force.

Under the treaties, foreign corporate shareholders will typically be subject to a withholding tax rate of 5-15%. Under the tax treaty between Norway and China, the dividends withholding tax rate is reduced to 15%. Corporate shareholders in the EU/EEA are exempt from dividend withholding tax in Norway.

Norway does not generally tax a Chinese shareholder who realises gain on shares in Norwegian companies, assuming that the Chinese shareholder does not have a permanent establishment in Norway.

When making an investment in a Norwegian company, Chinese investors may explore a number of different structures to optimise the tax position. The feasibility of these structures may depend on a number of factors, including the strategy and the corporate set-up of the investor, as well as the tax position of the company making the investment. Investing through an EU-based investment company is one possible structure, but the investment company will need to meet substance requirements to be allowed to benefit from the withholding tax exemption on dividends to EU/EEA shareholders.

A debt push down, typically through the use of a Norwegian acquisition vehicle, is another solution. Using this structure may effectively reduce dividend withholding tax and also improve the corporate tax position in Norway. However, any such tax planning needs to be analysed in detail to meet Norwegian substance requirements, thin capitalisation rules and substance-over-form tests.

Arne Didrik Kjørnæs is a senior partner at Wikborg Rein in Oslo and Geir Sviggum is a partner at Wikborg Rein in Shanghai. Tormod Ludvik Nilsen, a senior associate at Wikborg Rein in Shanghai, also contributed to this article



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