You can save a lot in tax deductions by investing in entrepreneurial companies

Posted by:
Are Berg Hjelle
on
October 21, 2021

Did you know that there are opportunities to get a tax deduction on you personally if you or your holding company make investments in a start-up company? It's pretty amazing, you can actually get a tax deduction for investing money in another companies.

Lower and upper limit for the deduction

You as a private person (personal taxpayer) can receive a deduction of up to NOK 1,000,000 for share contributions in connection with the creation of or capital increase when subscribing for new shares. You retain the entry value of the shares even if you receive the deduction. This can be very important if you later choose to sell the shares. The share contribution for the personal shareholder in the individual company must amount to at least NOK 30,000 in order for an income deduction to be granted.

A company can annually receive a maximum of 5 million in deposits that entitle to a deduction. The company can of course receive further investments, but does not have the opportunity to issue more in tax deductions than the limit of 5 million to its investors.

For companies that raise money, this provides a good opportunity to attract even more and larger investors as the investments give a deduction on the investor's personal tax return. In 2020 and 2021, a start-up company can distribute 5 million in deductions to investors who invest during these years. Deductions are not given where the capital increase takes place by increasing the nominal value of the shares.

If the deposit is made from an intermediate company (for example a holding company), the deduction shall be proportionately distributed to the personal shareholders based on what their percentage shareholding is.

Each individual personal shareholder can receive a deduction of a maximum of NOK 1,000,000.

If an intermediate company consists of two shareholders and makes a deposit of NOK 2,500,000, each individual shareholder will be able to receive the deduction of NOK 1,000,000.

For the shareholder, the other limit will apply to the total sum of all the deposits given in the income year. If deposits have been made to several companies, these are added together to a total amount. The other limit for the company applies to the total sum of all deposits received in the income year.   If contributions have been received from several shareholders, these must be added together to a total amount. Note that the requirements described below must still be met.

See the tables below for the limits that apply to the different income years:

Requirements for the company receiving the investment

The recipient of the share contribution (the company you invest in to receive the entrepreneurial deduction) must in principle be a Norwegian limited liability company. The provisions apply correspondingly to share contributions in foreign companies that correspond to limited companies. This presupposes that the company is domiciled in a country within the EEA and is liable to tax in Norway.

These are some of the requirements for the company you are going to invest in:

  • The company cannot be listed on the stock exchange
  • The company may not be older than six years, including the year of establishment, when the capital increase is registered in the Register of Business Enterprises.
  • At the end of the year, the company or the capital increase is registered in the Register of Business Enterprises:

            - the company's average number of employees must be less than 25 man-years

           - the company's total operating revenues and balance sheet total must be lower than nok 40 million

           - one or more public organs may not alone or together control more than 24% of the capital or voting rights in the company

  • The company must have an annual wage cost that forms the basis for employer's contribution of at least NOK 400,000. The condition must be met at the end of the year in which the company or the increase is registered in the Register of Business Enterprises, or the following year.
  • The company must mainly operate as a company that does not engage in passive asset management
  • The company may not be in financial trouble at the time of the capital increase
  • There may be other provisions, we recommend that you contact us to clarify this.

Requirements for the investor

The right to deduct only applies to personal taxpayers. Impersonal shareholders (for example stock companies) or companies with participant determination are not entitled to a deduction. You can admittedly get a deduction through your holding company, but the holding company must then report that you will receive the deduction privately. It is the personal taxpayer who will eventually receive the deduction.

This can be experienced as a bit twisted, so feel free to ask us if you want assistance with this. There is no right of deduction if there is more than one company between the personal taxpayer and the start-up company.

No deduction is made for share contributions if the investor, or the investor's related parties, are or have been a shareholder in the company. The same applies to any intermediate limited liability company. Nor may they have been shareholders in companies that may be in a group with the company that receives the contribution, and any previous companies, if the company was established by merger, demerger or tax-free transformation.

Related parties are a common term in the accounting world, but what is the meaning of the term?

  • is or has been a shareholder or employee in the company or in another company in the same group at the time of the share contribution
  • has been a shareholder, employee or owner of a previous company or other company in the same group if the company was established in connection with a merger, demerger or tax-free transformation, or
  • is employed by the company or in another company in the same group during the first three calendar years after the end of the calendar year in which the limited liability company or capital increase is registered in the Register of Business Enterprises.
  • if it is a limited company that makes the investment, it is a condition that the limited company that makes the investment is not or has been a shareholder in the start-up company or another company in the same group.

Board members will not be considered employees in accordance with these rules

Due to Covid-19, some special rules have been set up that can be used in 2020 and in 2021. The restrictions for employees or employees' close associates (items 1-3 above) do not apply if the share contribution is made and registered in 2020 or 2021. For these years, employees of the company receive deductions.

The new changes as described above mean that in some cases you can get a deduction for founding / investing in your own company. Note that each case must be considered here.

NB! Measure package for the income years 2020 and 2021

The amount limit is raised to NOK 1 million per investor

The limit for share contributions in start-up companies is increased to NOK 5 million

As a temporary measure for the income years 2020 and 2021, the scheme will be expanded to include employees and their close relatives

Other investor requirements

  • Ownership time: The requirement for ownership time dictates that the shares must be kept for a minimum of three calendar years after the end of the year in which the capital increase is registered.
  • Dividend: You or related parties cannot receive a dividend for at least three calendar years after the end of the year in which the capital increase was registered. A shareholder loan is considered a dividend, so you can not receive a loan from the company during these three years.

The share capital increase must take place in connection with the company aiming to raise capital through the tax incentive scheme.

Tax ABC 2020/21

Documentation should be kept in the minutes of the board and general meeting that the company takes into account to raise money through the tax incentive scheme.

Reporting

The deduction must be reported by the company that received the investment. For start-up companies, this is reported in items 9 and 23 in the Shareholder Register statement (RF-1086) with event type Foundation / new share issue with income deduction ".

If not all investors can receive the deduction, those who will not receive the deduction must be registered with another type of event. If the Shareholder Register statement is sent to the Tax Administration by the deadline of 31 January after the income year, the deduction will be pre-filled on item 3.3.14 in the tax return to the personal taxpayer.

If you make the investments through a limited company, the holding company must also report the investment in its AR statement. The holding company shall report the contribution to the personal shareholders in item 23 with transaction type "Deduction for investment in start-up company". It is important that the "Issuer's organization number" is stated. The issuer's organization number means the start - up company in which the holding company has invested.

The company risks major tax consequences in the event of incorrect assessments or incorrect reporting. The tax authorities can give additional tax in the event of incorrect reporting. If you are unsure of how the entrepreneur deduction is to be reported, you can submit your AR statement with Adminflow and you will be dragged through each step for correct reporting. Contact us for more information or test out our solution for free.

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