Banking and financing activities

There are separate rules on tax and value added tax for banks and financial institutions. This is reported in the tax return.

Does this apply to me?

This applies to banks, credit institutions, and financial institutions. 

 

  • Companies that are licenced and have their parent company in a financial group  
  • Financial foundations with a licenced company or a parent company in a financial group 
  • Norwegian branches of foreign banks, credit institutions, or financial institutions 

This is what the company must do

Banks must pay ordinary taxes and duties to operate a business. In addition, banks must pay financial activity tax. 

Special tax rules apply to income tax for banks and financial institutions, for example, transfer pricing rules for bank branches.  

There is an exemption for value added tax on financial services, and this applies especially to banks.  

Income tax

Banks can deduct losses on lending and guarantees that have been recognised as expenses in the annual accounts. See section 14-5, subsection 4, letter g of the Taxation Act, (lovdata.no, in Norwegian only). The IFRS 9 Chapter 5.5 regarding decrease in value (Ifrs.org) must be used as the basis for the assessment of lending and guarantees in the annual accounts.  

For loans that have been valued at fair value through profit or loss, deductions for losses on lending must be based on the measuring at amortised cost with the effective interest method in accordance with IFRS 9. 

The calculated and balanced interest income at the time of measuring lending at amortised cost by using the effective interest method, must be used as the basis for tax purposes. This replaces ordinary tax rules for the classification, calculation, and timing of interest income and other elements of income in connection with lending. Read more about this in IFRS 9.  

Income or cost elements related to loans that are not included in the measuring of lending at amortised cost according to the aforementioned accounting standards must be processed pursuant to ordinary tax rules. 

Amounts paid by financial institutions into the deposit guarantee fund and the resolution fund are deductible. 

For a bank from another EEA country with a branch in Norway, deductions are granted on costs for payments equivalent to the deposit guarantee and resolution funds in their country of origin.  

The size of the cost to be allocated to the Norwegian branch must be in accordance with the arm's length principle. This means that a bank with its head office in Norway that is operating through a branch abroad must allocate to this branch a portion of the costs for the deposit guarantee and resolution funds in accordance with the arm's length principle. 

Deductions are granted for interest on the bank’s debt.  

In addition, deductions are granted for interest from contingent convertible securities that are considered equivalent to the core capital to the bank. Contingent convertible securities are hybrid securities with characteristics from both debt and equity instruments. They take priority before share capital but come after subordinated debt. 

Based on the fact that banks as a rule pay financial activity tax on ordinary income and salaries, there are special rules for contributing and receiving companies regarding group contributions, see the section 10-2, subsection 1, second sentence of the Taxation Act (in Norwegian only). Group contributions from companies subject to financial activity tax must be adjusted by a factor corresponding to the tax rate on ordinary income divided by the tax rate on ordinary income. The factor for 2024 is 22/25 parts. See section 23-2 of the National Insurance Act (in Norwegian only). 

For the contributing company  

When a company liable to pay financial activity tax provides group contributions to a company that is not liable to pay financial activity tax, a deduction is only given for the part of the group contribution that remains after a downwards adjustment by the factor for the income year in question.  

For the receiving company 

When a company liable to pay financial activity tax receives group contributions from a company that is not liable to pay financial activity tax, the tax liability is limited to the part of the group contributions that remains after a downwards adjustment by the factor for the income year in question.

As a rule, banks must pay financial activity tax on salaries and ordinary income. The reporting regarding financial activity tax on ordinary income must be done in the tax return.  

When calculating foreign income for the maximum credit deduction, banks and financial institutions can use the direct allocation method for interest on debt to the foreign income. See also the case from the Tax Appeals Board of 23 August 2023 (in Norwegian only). 

More information: Credit deduction for tax paid abroad (in Norwegian only) 

Gains, losses, and dividends on shares and other financial products must be reported in the tax return.  

Those who need to report a large number of transactions can attach a spreadsheet in, for example, Excel format. 

Banks must report the value of financial derivatives for financial and tax purposes as at 31 December in the business information.

Two areas are particularly difficult 

  • One concerns the transition from income statement to taxable income. For financial derivatives that are covered by the tax exemption method, the transition must be executed through the use of permanent differences. For financial derivatives not covered by the tax exemption method, the transition must be executed through the use of temporary differences, but it can also be effected by using permanent differences.   
    The bank must nevertheless have an overview of the financial and tax values of the derivatives, and they must reconcile the transition between the income statement and the taxable income so that it is correct.

  • The second possibility of error is related to the calculation of the taxable value of financial derivatives. As a rule, financial derivatives are entered in the accounts at fair value. The recognised value in the accounts consists of different components, such as cost price, accrued interest, unrealised foreign exchange gains and losses, as well as adjustment to the fair value. As a rule, the tax value will deviate considerably from the accounting value, because the main rule for timing follows the realisation principle. There will normally be a difference in the tax value related to currency, accrued interest, and adjustment to the fair value. Unrealised foreign exchange gains and losses must not be included in the taxable income. 


Timing of interest in swap agreements 

The exchange of payment flows from an interest rate swap, a currency swap, or an interest rate-and-currency swap entails a total or partial fulfilment of the swap agreement, and results in the swap agreement being considered realised in full or in part, se the Supreme Court judgement HR-2009-86-A DnB Nor (Rt. 2009/32), paragraph 52 (in Norwegian only). “Interest” in an interest rate swap agreement is not considered interest pursuant to tax legislation, but income and expenses must be processed pursuant to the rules on gains/losses on realisation, see paragraphs 57 and 58 of the judgement. 

The Tax Administration bases their conclusions on an understanding of the Supreme Court judgement such as is found in the case processed by the Tax Appeals Board at the Central Tax Office for large businesses), see Utv. 2014 p. 627 point 3.3.1 SFS (SKN-2009-052, in Norwegian only). The timing of gains and losses on swap agreements can be summarised as follows, based on the due dates in the agreement: 

Different due dates 

If the agreement stipulates that the parties’ payments must not coincide in time, the timing will be different for the two parties to the agreement. In the case of different due dates, timing must be carried out once the individual party has fulfilled their obligation. Even if the amounts to be paid or received by the next due date are known, this does not affect the timing as long as the obligation has not been fulfilled. 

The same due date 

The basis here is that the swap agreement stipulates that both parties must fulfil their obligations at the same time, therefore both parties will obtain the unconditional right to the other party’s fulfilment on the due date. Gains or losses must be timed at the due date for both parties. 

The exception from this is if the dues are congruous, this means homogeneous, and a net settlement must be performed. This means that if one of the obligations lapses because the reciprocal obligation exceeds the due, timing must nevertheless be carried out already at the time when the final conditions meant to apply until the settlement are decided. 

Periodical “reset” of currency elements in swap agreements 

In swap agreements, a periodical settlement (reset) of currencies can be agreed upon during the period of the agreement. 

The re-setting of the exchange rate must be regarded as a taxable partial realisation, and gains and losses are converted at the exchange rate on the timing date. See the preliminary statement of the Central Tax Office for large businesses 2016-606 SFS BFU, quoted in Utv. 2017 p. 393 point 1.2.4.(in Norwegian only) for a detailed description (Gyldendal rettsdata, requires login).

Terminating or changing derivatives 

Cases may occur where the gains and losses on derivatives must be timed when changes are made to the agreement, and when a previous agreement is largely replaced by a new agreement.

The termination of a previous interest rate swap agreement, where a new interest rate swap agreement was entered into at the same time, results in a taxable realisation of the first agreement, thus being considered a loss that must be timed. In these cases, it must be specifically assessed whether the conditions for realisation and timing are met.

This has been assessed by the Tax Appeals Board: Question about the deduction for loss on the termination of interest rate swap agreements (in Norwegian only) 

Interest rate and currency swaps and unrealised foreign exchange gains and losses 

Some banks have considered combined interest rate and currency swap agreements as two loans, one borrowing and one lending, and conclude that the rules on receivables and debts in foreign currencies apply.  

As a rule, such agreements are covered by the Securities Trading Act as derivatives. Currency gains and losses must therefore be timed according to the realisation principle.  

The provision on receivables and debts in foreign currencies does therefore not apply here. 

Transfer pricing for bank branches

More about transfer pricing: Reporting and documenting transfer pricing - the Tax Administration 

The AOA report by the OECD

The Report on the attribution of profits to permanent establishments (Oecd.org) is especially relevant for bank branches in connection with the attribution of profit to the branch. 

The report was published in two editions, first in 2008 and then i 2010. If the tax treaty relevant for the branch has been based on the OECD Model Tax Treaty from before 2010, the 2008 edition should be used. For tax treaties based on the OECD Model Tax Treaty from 2010 or later, the 2010 edition should be used.  



The key moment in connection with the attribution of profit from lending activities will be the identification of the company’s central risk bearing operating features. This is called “Key Entrepreneurial Risk-Taking functions”, abbreviated to KERT functions.  

These functions will to a large extent govern the attribution of loans and related profits. AOA distinguishes between KERT functions related to the creation and the subsequent management of loans. For KERT functions, emphasis is placed on active decisions in accepting or administrating risks in connection with loans. The financial ownership of the loan must be allocated to the location that executes the functions, and that afterwards recognises income and expenses from holding the loan, transferring the loan, or selling the loan to a third party. This is described in  AOA 2010 PART II: point 8 (Oecd.org). 

As a rule, treasury in banks has the main responsibility for raising capital for the bank. The organisation of the functions and their complexity may vary, and it will be necessary to map and analyse the functions closely for transfer pricing purposes. The normal functions in treasury have been described in detail, among others, in AOA 2010 PART II: point 162 (Oecd.org). Treasury is also discussed in Chapter X of the OECD Transfer Pricing Guidelines.

The funding of a bank branch must consist of interest-bearing and non interest-bearing capital. Non interest-bearing capital is considered “free” capital. This has been defined as "i.e. funding that does not give rise to a tax deductible return in the nature of interest." According to AOA 2010 (Oecd.org), the branch must have capital at its disposal that is in proportion to the functions executed there, the assets used, and the risks it takes.  

The attribution of non interest-bearing capital is necessary for the calculation of the branch’s profit according to the arm's length principle, see AOA 2010 PART II, point 85 (Oecd.org). 

The capital allocation method is mostly used in practice, but other methods are also described as authorised methods, see AOA 2010 PART II, point 98-105 (Oecd.org). 

In connection with the attribution of profits to the bank branch, the branch’s interest income and interest costs will be of great significance. As a rule, transfers of capital between the head office and the branch will produce a basis for the calculation of interest. For bank branches, it is an established practice to calculate interest on internal receivables and debt between head office and branch and between branches. This can be referred to as internal interest dealings. 

When pricing treasury functions and interest dealings, the transfer pricing methods from the OECD Transfer Pricing Guidelines must be used. This means that amounts, currencies, terms, and other key factors must be emphasised in the comparability analysis. AOA 2010 PART II: point 165 (Oecd.org). 

It is emphasised in AOA that the pricing method that is used must provide an arm’s length remuneration to treasury functions. Internal interest dealings must be priced within the arm's length principle. This is meant to reflect the hypothetical capital structure of the bank branch, including non interest-bearing capital. AOA 2010 PART II: point 169 (Oecd.org). 

Value added tax

Banks that are registered in the Value Added Tax Register must report financial supply as exempt from VAT.

Please note that supply exempt from VAT must not be confused with zero-rated supply. 

Allocation key

Deductions for joint operating expenses can be allocated according to a supply-based allocation key if the allocation mirrors the use to a reasonable degree.

The Ministry of Finance has stated that all supply related to the enterprise must be considered part of the enterprise’s total supply (in Norwegian only). 

The allocation key that is used for joint acquisitions or a change of the allocation principle can be described or attached to the VAT return. This is not required if there has been a dialogue with the Tax Administration in connection with guidance or audits.

As a rule, the supply in banks is exempt from VAT pursuant to the exemption for financial services in the Value Added Tax Act. The legislator and the Supreme Court find that the established principles of interpretation from EU law are a relevant source of law for the interpretation of the financial exemption in Norway. These principles are very practical. This implies that the legal development in the EU, especially through the practice of the Court of Justice of the European Union, is relevant for the legal development for the tax and duty treatment of financial services in Norwegian banks. Services that are generally taxable according to their character must be subject to tax, even when they are supplied by banks. 

Examples of taxable activity

Examples of taxable activities are financial leasing, real estate services and consultancy. When banks have both taxable and exempt activities, this is often called “mixed” activities, and these activities raises more tax-related questions.

Delimitation question 

If financial services are supplied together with taxable services, delimitation questions can occur. It must be considered whether the services can be split and taxed separately.. Services that cannot be split, must afterwards be classified as either taxable or exempt. The evaluation is made specifically. The rules in this area are often called “principal activity rule” and originates in EU-law.

Purchase of services from abroad

Another important delimitation question occurs with regards to the purchase of services from abroad. Banks are under obligation to calculate value added tax on taxable remotely deliverable services purchased from foreign businesses. Technical services, such as IT, are a typical example of a service subject to tax.  

Subcontractors to banks supplying services that are considered financial services are not subject to tax, and banks therefore have no obligation to calculate value added tax in the case of reverse charges. 

It requires a specific assessment of whether the service of the subcontractor is considered significant and specific for the financial exemption. These are principles from EU law that are a central part of Norwegian tax legislation regarding financial activities. It’s important that specific evaluations are made regarding the agreement and the nature of the service to assess tax liability. 

Services between head office and branches

Banks are often organised with a head office in one country and branches (permanent establishments) in other countries. The exchange of intra-group services between head office and branches is not considered supply. Services that are consumed in Norway and that are tax free for the head office can still be affected by a special safety valve in the regulations for reverse charges. Please note that the Ministry of Finance is considering rule changes in this area (in Norwegian only).

 

Dates and deadlines

Businesses must submit the tax return with the business information by 31 May at the latest.