When the customer does not pay – a loss on receivables

A receivable is money your business is owed. If the business does not receive payment, you can claim a deduction from income for the loss. Under certain conditions, the business can deduct value added tax from the receivable.

Does this apply to me?

You can claim a deduction for a loss on receivables if you run a business.

A receivable can, for example, be:

  • the sale of goods, a service or money
  • an advance payment, meaning you’ve paid for goods or services you have yet to receive 
  • a loan arrangement connected to the business 

Deductions

You can claim a deduction for a loss on receivables if the amount is recognised as income and the conditions in items 1-3 are met:

 

Business activity may, among other things, occur via:

  • private limited companies (AS) and public limited companies (ASA)
  • businesses assessed as partnerships (SDF, DA, ANS)
  • Norwegian registered foreign companies (NUF)
  • sole proprietorships (ENK)

Check whether you’re self-employed

A receivable is considered to be lost if one of the conditions under items a) to d) are met:  

a) The person who owes you money has not paid within six months after the due date and you have sent at least three reminders without the receivable being paid.
or
b) The receivable has been sent to debt collection or forced collection without it being paid.

If the receivable has been sent to debt collection, this means that a process of collecting the payment has been set in motion after the payment deadline for an invoice has expired, either from the person who has the receivable or from a debt collection agency. If the claim has been sent to forced collection, this means that one can deduct the receivable from the salary of the person who owes money or place attachments on their assets. Forced collection is carried out by the enforcement officer.

or
c) The person who owes you money has gone bankrupt and there are no assets in the bankruptcy estate to cover the receivable. This also applies to the deletion of businesses.

Bankruptcy is a legal scheme that is used when a person or a company cannot pay what they owe. In a bankruptcy, the person who owes money loses the right to decide what happens to the assets and valuables that may be seized.

or
d) Other circumstances that mean you cannot recover the receivable and that it is, consequently, lost.

Exception

A receivable is not deemed lost if it is sufficiently secured by collateral, guarantee, or the like. 

If the receivable is secured by guarantee, this means that others have taken on the responsibility of paying the debt owed by the debtor.

To receive a deduction for the loss, the receivable must have arisen in your normal business activity. Normally this is an invoice or an advance payment – you have sold goods or services without being paid.

Example:

If you run a garage and send an invoice for car damage reparation and the customer does not pay, you can claim a deduction for the loss.

If you run a garage and loan money to a florist that goes bankrupt, this is not connected to your garage business activity and you will not receive a deduction for the loss.

You will also receive a deduction for loss on lending if lending money is part of the business activity, such as it is, for example, for banks.

As a general rule, losses on receivables between related parties are not deductible.

Specific information regarding

As a general rule, losses on receivables between businesses that are considered related parties are not deductible. This means that businesses that have financed a subsidiary or another related party through a loan cannot claim a deduction if the loan is not repaid.

A deduction for a loss on receivables will not be granted if both the creditor (owner of the receivable) and the debtor are businesses that are encompassed by the tax exemption method and where the businesses are also considered related parties. If the creditor is a business assessed as a partnership, the business cannot claim a deduction for a loss on receivables if the debtor is encompassed by the tax exemption method and the businesses are related parties.

Businesses are considered related parties when the creditor (the owner of the receivable) at any point in the receivable’s lifetime has owned 90 percent or more of the shares or the ownership interest in the debtor (the business that owes money). However, in this assessment, you should not go further back than 1 January in the fourth year preceding the year of sale.

Some examples:

  • The businesses are also related parties in the case of indirect ownership if the ownership interest of 90 percent or more is fulfilled at each stage of the ownership chain.
  • The condition is met if two or more businesses in the ownership chain meet the condition of a 90 percent ownership share in the debtor.
  • If the creditor and debtor (directly or indirectly) are owned by a joint parent company that has an ownership of 90 percent or more, they will be considered related parties. This means that a deduction for losses on claims between subsidiaries cannot be claimed:

Not related parties

If the debtor owns 90 percent or more of the creditor, they will still not be considered related parties.

Some examples:

  • if a wholly owned subsidiary lends money to the parent company
  • if the creditor business is a second-tier subsidiary and the debtor business is the subsidiary of the same parent company.

Some receivables that arise in connection with normal business activity will still be deductible, even if the businesses are related parties. This applies to:

  • loss on accounts receivable (invoices or advance payments)
  • claims where the value of the receivable has previously been assessed as taxable income or has been included in a gain or loss settlement with tax effect for the creditor business or a business that is a related party of the creditor business.
  • receivables that arise in connection with triangular mergers or triangular demergers that are conducted in accordance with the receivables model
  • banks and finance enterprises’ loss when the receivable is part of their normal lending activities

The connection requirement also applies in groups for holding companies, development companies, and the like. As a general rule, the businesses’ business activity must be treated separately even in groups, but if the creditor (the person who has the claim) is very integrated and active in the debtor’s business, the connection requirement may be met. The creditor’s activity must exceed a certain level. It is not enough to own shares in a debtor’s business, partake in general meetings and on the board, or perform sporadic tasks for the debtor’s business. The activity must be of some importance to the business' day-to-day operations.

As a shareholder, you’re generally not entitled to deductions for losses on guarantees and/or loans to businesses in which you have shares or holdings. This also applies to shareholders who work in the business and receive a salary, even in the loan was given to secure their own salary income. This also applies to you if you have other positions in the business, as a chairperson or a member of the board.

The exception is if your activity as a shareholder in the business you have lent money to or have provided a guarantee for is considered business activity. If so, you must meet the requirements for business activity.

Partners in a business assessed as a partnership will normally be entitled to claim a deduction for a loss when they have provided a guarantee for a loan to the business’ creditors. This does not apply to partners in a NOKUS – a Norwegian-controlled foreign company.

If you have given a loan to, or provided a guarantee for, another business you can claim a deduction for losses on receivables if the loss is connected to your business. If you lend money to another business where the goal is to obtain customers, assignments, access to premises or goods or the like, you’ll be able to claim a deduction for losses on receivables.

Example:

If you carry out business activity as a carpenter and lend money to a retailer in exchange for a reduced price on materials and/or that the retailer recommends your services to their customers, this may provide a connection between your business and the loan, and you’ll be able to claim a deduction for the loss.

If you have available capital temporarily placed in a receivable until the funds are to be used in the business, any loss will normally be considered lost in the business. This could, for example, be investments in bonds and loans. If the goal of this is to achieve the greatest possible increase in value or return, this can be regarded as an investment with no connection to the business, and no deduction is then given for the loss. This could, for example, be investments in shares.

What you need to do

You must state a loss on a receivable in either the business information or the income statement of the tax return for the year the loss was considered a permanent loss.

Report the following in the tax return

If the claim is an invoice or an advance payment, the whole amount that has been lost must be entered.

Example:

You have issued an invoice of NOK 75,000 that has not been paid. The loss is NOK 75,000, and this must be entered into the tax return.

If you have received a property or an asset(s) to cover the receivable, the value of the property or asset(s) at the time of the takeover must be deducted from the amount of the receivable.

Example:

You have a receivable amounting to NOK 1,000,000 and receive an asset valued at NOK 600,000. Your loss will then amount to NOK 400,000.

If you have recognised a receivable as a deduction and later receive full or partial payment, this amount must be recognised as income.

Example:

You recognised a loss on a receivable amounting to NOK 1,000,000 in year 1. In year 2, you received NOK 400,000 to cover this receivable. Then you must recognise NOK 400,000 as income in year 2.
 

 

Report the following in the a-melding

If you’re registered in the Value Added Tax Register and the receivable includes value added tax, you can, under certain conditions, change the VAT return.

The basis for the calculation can be corrected if an outstanding claim on which there has previously been calculated output VAT is finally deemed to be a loss due to the debtor's insolvency, see section 4-7, subsection 1, of the Value Added Tax Act. 

You must enter the amount in a separate row in the VAT return for the period in which the loss meets the conditions for deduction. This part of the receivable must not be entered in the tax return.

Supporting documents

You do not need to send us supporting documents now, but you must be able to provide them if asked. This could, for example, be reminders you have sent regarding the receivable.

Sources of law (in Norwegian)