The facts in this case are:
- A Norwegian resident company held 100% of a German limited partnership (Kommanditgesellschaft).
- The general partner of the limited partnership was a German GmbH which neither had any ownership in the equity of the partnership, nor any right to the profits or loss of the partnership.
- However, the general partner was entitled to a refund of costs incurred by the partnership and an annual remuneration of 5% of its own paid-in capital (which was €1,500).
In connection with an intra-group reorganization, the shares of the partnership were transferred from the Norwegian resident company to another group company. As a result of the transfer, a loss was realized which the Norwegian resident company claimed as a deduction on its annual tax return.
The Norwegian tax authorities denied the deduction because they did not consider the limited partnership to be a transparent entity for Norwegian tax purposes, but determined that it was a company. The loss, thus, was not deductible because the investment was covered under the Norwegian exemption method.
Supreme Court’s decision
The Norwegian Supreme Court agreed with the Norwegian tax authorities, and concluded that in order for the loss to be deductible, the limited partnership must be considered to be a transparent entity—and not a company—for Norwegian tax purposes.
The Supreme Court found that to qualify as a transparent entity, at least one of the partners of the partnership must have an unlimited liability for the obligations of the partnership. In this case, the German limited partner did not have any ownership in the equity of the partnership, was not entitled to any part of the profits, and would not bear any part of a loss. Thus, Supreme Court held that (1) the limited partner was not considered to be a partner for Norwegian tax purposes; (2) that the partnership did not have any partners with unlimited liability for the obligations of the partnership; and (3) the partnership did not qualify as a transparent entity under Norwegian law.
Moreover, the limited partnership was subject to the Norwegian participation exemption method as a company comparable to a Norwegian limited company. Thus, the deduction of the loss on the investment was properly denied, with the Supreme Court’s conclusion relying in part on the European Economic Area (EEA) agreement and judgments of the Court of Justice of the European Union (including the Aberdeen Property case (C-303/07)).
Lastly, the Supreme Court concluded that its decision applied, regardless as to whether the partnership was considered transparent for tax purposes in Germany.
Tax professionals in Norway note that a consequence of the hybridization of limited partnerships established in the EEA is that income derived by the partnership may be subject to “double non-taxation.”
Under Norwegian law, income from such partnerships will be considered to be dividends. If the limited partnership is a resident in the EEA, the dividends would be tax-exempt income for the Norwegian shareholder.
If the general partnership is resident in a low-tax jurisdiction in the EEA, it must additionally meet the “substance test” (which was not contested in Hydro K/G case because it was subsequently added to law). However, it appears that there are good arguments supporting a position that limited partnerships that are organized and established in accordance with the current regulations of the country of registration would satisfy the substance test.
Further, dividends may be distributed out of Norway with no withholding tax if the dividends are distributed to an EEA-resident shareholder.
When such a limited partnership is considered transparent in its country of registration, the income of the partnership will not normally be taxable in that country unless the partners are also resident of that country or the limited partnership creates a permanent establishment in that country. This means that a transparent partnership in an EEA country that is not considered to be transparent in Norway, may be used for Norwegian tax planning purposes.
For more information, contact a tax professional with the KPMG member firm in Norway (KPMG Law Advokatfirma DA)
Thor Leegaard, Tax Partner
+47 4063 9183
Erik Landa, Senior Manager
+47 4063 9768
Daniel L. Høgtun, Manager
+47 4063 9437