This country-specific Q&A provides an overview to tax laws and regulations that may occur in Norway.
This Q&A is part of the global guide to Employee Incentives. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/employee-incentives/
What kinds of incentive plan are most commonly offered and to whom?
Various forms of cash bonus plans are commonly offered to employees. Such plans are typically cash based, but could also be linked to share price development through a phantom stock plan.
- Collective bonus – profit sharing
- Team based bonus plans
- Individual performance based bonus plans
Share option plans
Various forms of share option plans or share subscription rights are also commonly offered to employees.
Share purchase plans
A typical broad employee plan is purchase of shares with a discount, often in combination with a mandatory holding period.
Periodic discounted share purchases in combination with a share saving scheme.
Some companies choose to award matching shares based on a factor of original share purchase instead of a discounted share purchase in combination with a minimum holding period.
What kinds of share option plan can be offered?
According to the company legislation, shares must be subscribed to at least the nominal value. Share options to employees that will be fulfilled with existing shares do not require a minimum exercise price.
There are no special other restrictions related to type of share option plans that can be offered.
What kinds of share acquisition/share purchase plan can be offered?
Typical share purchase plans are different varieties of purchase of shares with a discount. Such plans may involve a saving arrangement where a portion of the monthly salary is withheld and periodically used to purchase discounted shares.
Another funding method may be a loan to employees, given in relation to discounted share purchase, with monthly repayment. An interest free loan could be tax free if the amount is limited and repayment within 12 months. The current (until May 2019) maximum interest free loan that can be given tax free is NOK 58,129.
Share acquisition/share purchase plans may be combined with share matching with further conditions or sales restrictions.
What other forms of long-term incentives (including cash plans) can be offered?
One may also design derivative incentive plans (phantom stock, appreciation rights etc.) that measure on a certain underlying asset or reference value. The derivatives may be structured as independent financial instruments. Derivative incentive plans measuring on the share value of the company could be an alternative to above-mentioned share plans.
Are there any limits on who can participate in an incentive plan and the extent to which they can participate?
Generally, there are no limits on who can participate in an incentive plan or the type of conditions the company can set forward as long as the plan can be objectively justified and is not in conflict with statutory law or collective agreement(s).
Norwegian legislation prohibiting discrimination must be complied with. The employers must also observe relevant regulations and restrictions regarding stocks and options where they apply.
An incentive plan is normally based on a mutual agreement or on a discretionary basis. They are not legally required by law.
It is not uncommon for senior executives or management teams to be offered participation in an incentive plan as encouragement.
Can awards be made subject to performance criteria, vesting schedules and forfeiture?
Yes, it is common to include performance criteria, vesting schedules and forfeiture in the different incentive schemes.
In some cases, there may be conditions linked to shares that are already purchased or awarded to the employee, with a claw-back clause if performance criteria, financial results or continued employment are not met. Such cases may lead to negative overall tax consequences since an award may be taxable as employment income, but a loss due to a claw-back in some cases may be treated as a capital loss with lower effective tax reduction.
What are the tax and social security consequences for participants in an incentive plan including: (i) on grant; (ii) on vesting; (iii) on exercise; (iv) on the acquisition, holding and/or disposal of any underlying shares of securities; (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.
A benefit in kind or in cash received through an employment is as a starting point taxable once received, or earlier, if the employee has an opportunity to receive the benefit. This is interpreted as the maturity date, taxation will normally occur no later than when the payment is agreed to be paid.
Deferral of taxation may occur where there are sufficient restrictions and limited possibility for the employee to elect investment options. In such cases, the following conditions needs to be fulfilled:
- The plan is mandatory for the employee; it is not an option to receive cash or a benefit as an alternative;
- The employees have limited or no influence on how the funds should be invested;
- The employees have no right to receive dividends and cannot dispose of the funds through sale, as security for loan or in any other way before a certain time or when certain conditions have been fulfilled.
For share options in relation to employment, there are special provisions regarding time of taxation. Share options are taxable at exercise.
An annual discount may be tax free for all-employee equity based plans. The tax free discount does not apply to cash based plans or where the shares are held indirectly. Some limitations regarding seniority may be included without disqualifying the plan as an all-employee plan.
The current annual tax-free discount for share purchases and share option exercise is maximum 20 %, limited to NOK 3,000. The tax-free discount will also be excluded from the Employer National Insurance basis.
(i) on grant;
Shares: Free share awards and purchase of discounted shares are taxable when shares are received.
Derivative: If the employee does not pay fair market value for the derivative at investment, the discount will be subject to marginal tax/social security of 46.6% (proposed reduced to 46.4% in the pending 2019 fiscal budget).
(ii) on vesting;
Usually no tax or social security due
The concept of “vesting” may differ from plan to plan. If vesting is connected also with protection from loss related to the investment, the acquisition date for tax purposes may be deferred until when sufficient protection mechanisms no longer apply.
(iii) on exercise;
Share Option plans, share subscription rights and Restricted stock units: The exercise of an option is subject to income tax. The taxable benefit, i.e. the difference between the market value of the underlying share at exercise and the exercise price (less any price paid by the employee at grant) is subject to income tax and social security.
Derivative: If the employee paid fair market value at investment, a 23% flat rate applies on capital gains (proposed reduced to 22% in the pending 2019 fiscal budget). The gain is not subject to social security contribution.
If a discount applied on investment that was reported as taxable employment income at investment, the gain at exit is taxed at the flat rate of 23 %.
If the employee did not pay fair market value for the derivative and no employee income was reported at the time of investment, the gain will most likely be considered employment income and subject to the marginal tax/social security of 46.6%.
(iv) on the acquisition, holding and/or disposal of any underlying shares of securities; and
Changes in the underlying object for a share option due to merger, demerger or in the corporate structure usually do not result in taxation.
A special tax deferral plan was introduced from 2018, applying to qualified plans involving shares in newly established, smaller start-up companies. Under this, it is possible to defer taxation until actual sale of the underlying shares. The conditions are, however, many and complex.
(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.
Loans to shareholders may in some cases be seen as a dividend payment for tax purposes, resulting in dividend taxation. A general exemption applies for loans to employees who, together with closely related individuals, directly or indirectly holds less than 5 % of the shares and less than 5 % of the votes.
The benefit of a low interest loan within an employment relationship is subject to taxation and social security using an interest rate set by the Directorate of Taxes bimonthly. Interest free or low interest loans may be tax free if the amount is limited (NOK 58,129) and repayment occurs within 12 months. Third party loans given to employees may be treated in the same way as loans from an employer if the terms, fees and interest rate deviate from general market terms.
What are the tax and social security consequences for companies operating an incentive plan?
The employer is required to withhold both tax and social security contributions payable whether the awards are cash or equity settled. Withholding must be in accordance with the participant's tax withholding card (which is issued by the tax authorities based on the previous year's earnings). Tax and social security must be withheld and paid by the employer every second month, i.e. on the 15th of every second month (beginning in March).
The employer is required to pay employer’s social security contributions on the amount subject to income tax. The employer may be exempt from paying the contributions if the employee is not subject to the Norwegian National Insurance Scheme or is exempt from employer reporting liabilities in Norway.
(i) on grant;
Shares: For free share awards and purchase of discounted shares the taxable benefit is included in the basis for payroll tax of 14.1 %.
Derivative: If the employee does not pay fair market value at investment, the discount is subject to payroll tax of 14.1 %. The cost is deductible for the company.
(ii) on vesting;
Usually no consequences for companies unless the vesting date is when sufficient restrictions are lifted to consider the employee as a share owner.
(iii) on exercise;
Share Option plans, share subscription rights and Restricted stock units: The taxable benefit is included in the basis for payroll tax of 14.1%.
Derivative: If any discount was subject to payroll tax at investment, there is no consequences for the company operating the plan at exit. If the gain at exit is considered employment income, payroll tax at 14.1 % will most likely be due on the gain.
(iv) on the acquisition, holding and/or disposal of any underlying shares of securities;
Changes in the underlying object for a share option due to merger, demerger or in the corporate structure usually do not result in payroll tax.
(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.
Benefit of a low or no interest loan to an employee may be subject to payroll tax if considered taxable. See above regarding individual tax consequences.
What are the reporting/notification/filing requirements applicable to an incentive plan?
A taxable benefit received by an employee should be included in the monthly payroll reporting that is sent electronically to the tax authorities, usually through a payroll system.
The due date for individual income tax returns is 30 April following the end of the tax year. The due date for self-employed individuals is 31 May. Extension of the deadline of up to one month is available upon application.
A taxable benefit related to an incentive plan, operated by a company that is subject to the Norwegian reporting scheme, should be pre-filled as a remuneration item in the partly pre-completed tax return issued by the tax authorities in early April. The employee should check that the amount subject to income tax is correctly included in the tax return. Corrections are necessary only if not already included based on reported information.
Wealth tax basis may in many cases not include shares, financial instruments and vested share options. Year-end value may need to be reviewed and included in the tax return.
A special attachment to the individual return (form RF-1059) should be completed for foreign shares that are not included in the “Shareholders’s tax report” (form RF-1088) from Norwegian companies and foreign companies registered on Oslo Stock Exchange. The information to be provided in RF-1059 is basic information about the company, the number of shares, the historical cost price, sales price and proceeds and dividends.
Do participants in incentive plans have a right to compensation for loss of their awards when their employment terminates? Does the reason for the termination matter?
Whether the participants have a right to claim compensation depends on the legal basis of their claim.
Where the incentive plan is based on a mutual agreement, the employee’s right to compensation must be interpreted on the basis of the agreement and in accordance with the common intentions of the parties at the time of the agreement.
The employee may in some cases claim compensation on the basis of fault or negligence (“culpa” liability). For this to occur, the employee must show that there is a basis for liability, financial loss and causation between the basis for liability and the financial loss.
An incentive plan may be a result of regular practice or policy of the company.
In such case, one must carefully view the type of plan, the purpose of the plan, company guidelines, how it has been implemented by the company as well as other relevant factors. Whether the incentive plan is discretionary and solely based on the company’s administrative authority may matter too.
The reason for termination is a relevant factor.
In the event the employee is unlawfully dismissed, the employee may claim compensation in accordance with the Norwegian Working Environment Act.
The compensation is normally based on what the court deems reasonable in view of the financial loss, circumstances relating to the employer and employee and other facts of the case.
Do any data protection requirements apply to the operation of an incentive plan?
Incentive plans will necessarily involve processing of the employees’ personal data. Data protection legislation, hereunder the GDPR, will therefore apply in full.
Processing personal data for the purposes of an incentive plan will entail recording, analysing and measuring the employees’ work performance, which is a form of processing typically considered more invasive. It is therefore important that the undertaking exert an appropriate amount of effort to ensure that it provides all the relevant information about the processing to its employees pursuant to articles 12-14 of the GDPR, and explains the parameters of the performance evaluation in a clear and concise language. This information should be available to the employees at all times.
Due to the invasive nature of the processing, extra care should be taken when evaluating the risks and implementing appropriate measures to ensure data protection related to the processing in accordance with article 32 of the GDPR. In particular, it is important to ensure that access to the incentive plan data is restricted on a strict need-to-know basis.
The conditions of the incentive plan should be included in the employment contracts’ salary terms, so that fulfilment of the employment contract may serve as the legal basis for the processing. Consent should not be relied upon as a legal basis, as it is doubtful whether this would be valid from privacy perspective in an employment context.
Are there any corporate governance guidelines that apply to the operation of incentive plans?
The Norwegian Corporate Governance Board (“NUES”) issues the recommendation on corporate governance for companies listed in Norway. The latest Norwegian Code of Practice for Corporate Governance was published 17 October 2018. Article 12 regulates remuneration of executive personnel. NUES articles 12 provides recommendation on how the company’s guidelines for the remuneration of executive personnel should be set. If said recommendation is not complied with, please note that the company, as per section 7 of the Oslo Stock Exchange continuing obligations, must provide a report on the company’s corporate governance in the directors’ report or in a document that is referred to in the directors’ report. The report must cover every section of the NUES recommendation. If the company does not fully comply with the recommendation, the company must provide an explanation of the reason for the deviation and what alternative solution it has selected.
NUES article 12 states the following:
“The board of directors is required by law (i.e. the Norwegian Public Limited Companies Act, section 6-16 a) to prepare guidelines for the remuneration of the executive personnel. These guidelines are communicated to the annual general meeting. The board of director’s statement on the remuneration of executive personnel should be a separate appendix to the agenda for the general meeting. It should also be clear which aspects of the guidelines are advisory and which, if any, are binding. The general meeting should vote separately on each of these aspects of the guidelines.
The guidelines for the remuneration of the executive personnel should set out the main principles applied in determining the salary and other remuneration of the executive personnel. The guidelines should help to ensure convergence of the financial interests of the executive personnel and the shareholders.
Performance-related remuneration of the executive personnel in the form of share options, bonus programmes or the like should be linked to value creation for shareholders or the company's earnings performance over time. Such arrangements, including share option arrangements, should incentivise performance and be based on quantifiable factors over which the employee in question can have influence. Performance-related remuneration should be subject to an absolute limit”.
The English translation may be found here:
Are there any prospectus or securities law requirements that apply to the operation of incentive plans?
According to the Norwegian Securities Trading Act, where an offer to subscribe for or purchase transferable securities is addressed to 150 or more persons in the Norwegian securities market, and involves an amount of at least EUR 1,000,000 calculated over a 12 month period, a prospectus shall be prepared in accordance with the rules of this chapter. The same applies where an offeror residing in Norway makes an offer in another EEA state and the prospectus requires approval. This only applies to share based incentive plans.
However, there are some exceptions. The obligation to prepare a prospectus does not apply, inter alia, where the offer is addressed to current or former employees or board members by the employer or by another company in the same group, provided that the company concerned has its headquarters or registered address in an EEA country or a third country approved by the prospectus authority, and that a document is available containing information on the category and number of securities, as well as the background to, and conditions for, the offer.
Do any specialist regulatory regimes apply to incentive plans?
Financial institutions shall comply with the rules set out in the Norwegian Act on Financial institutions and Financial Groups chapter 15 and affiliated regulations. The board of directors shall determine and ensure that the company at all times has and practices a remuneration plan that will apply to the company and its subsidiaries. The remuneration plan must contain rules for executive employees, for other employees and employee representatives with tasks that are of great importance to the company’s risk exposure and for other employees and employee representatives with equivalent incentive plans, as well as employees and employee representatives with tasks related to controlling.
Remuneration includes payment in kind, bonuses, allocation of shares, subscription rights, option or other forms of remunerations linked to shares or the development of the share price of the company or of other companies within the same group of companies, as well as pension schemes, severance pay arrangements and any form og variable element in the remuneration, or special remuneration in addition to the basic salary. The regulation to the Norwegian Act on Financial institutions and financial Groups includes comprehensive provisions with regard to salary regimes (including incentive plans) for key personnel in financial institutions. Not to limit the importance of all aspect of the regulation, we emphasize that any variable remuneration must not exceed 100 % (up to 200 % if certain criteria are met) of the base salary. Please also note that specific rules applies as to the content of any incentive plan, i.a. must at least 50 % of any variable remuneration be based on shares (or similar equity instruments) in the financial institution in question.
The company shall conduct a review of the incentive plans at least once a year, and a written report shall be prepared. The report shall be reviewed by independent control functions. If required by the Norwegian Financial Supervisory Authority, the report shall be presented.
Are there any exchange control restrictions that affect the operation of incentive plans?
Other than the Corporate Governance rules as further described above (clause 12 above), there are no specific stock exchange restrictions. Please however note that section 6-16a of the Norwegian Public Limited Companies Act (which applies to all listed Norwegian companies), states that the board of directors shall prepare a declaration on the fixing of salaries and other remuneration to the general manager and other senior employees. The clause in the said act is further described in section 16 below.
What is the formal process for granting awards under an incentive plan?
The board of directors of public limited liability companies are obliged to prepare a statement in respect of the remuneration of executive personnel. Remuneration includes payment in kind, bonuses, allocation of shares, subscription rights, option or other forms of remunerations linked to shares or the development of the share price of the company or of other companies within the same group of companies, as well as pension schemes, severance pay arrangements and any form og variable element in the remuneration, or special remuneration in addition to the basic salary. The statement shall be approved by the shareholder on the annual general meeting. An advisory vote shall be held on the board of directors’ guidelines for setting the remuneration of executive personnel.
If the incentive plan includes share options (either in the form of a proxy for the Board of Directors to issue shares or in the form of granting warrants) for the employees, a formal process shall be completed. The board of directors shall draw up a proposal, which shall be approved by the general meeting. The resolution shall be notified to the Norwegian Business Register.
Can an overseas corporation operate an incentive plan?
Yes. An overseas corporation can operate an incentive plan. However, the foreign company may have to comply with prospectus requirements regarding offer of shares in Norway.
In order for the cost to be deductible for tax purposes for the Norwegian employer, a recharge from the overseas corporation must be carried out. The recharge must be arm’s length and should be based on a written agreement.
Can an overseas employee participate in an incentive plan?
Yes, there are no restrictions for foreign employees.
How are share options or awards held by an internationally mobile employee taxed?
Taxation of share options or awards held by internationally mobile employees depends on domestic law and if the individual is resident abroad according to a Tax Treaty. In some cases, it is relevant for the tax situation in Norway if the individual is resident, has a limited tax liability for work performed in Norway or is considered as emigrated for tax purposes following departure.
It is recommended to consult with a tax adviser as taxation, social security and avoidance of double taxation may be complex in many situations.
Taxation of share options and similar create many different considerations:
Award before employment in Norway: Tax obligation and tax rate applicable depends on link to an employment in Norway
Exercise during employment in Norway: Taxation and method for avoidance of double taxation depends on tax status according to domestic law and tax treaty and if part of the benefit is considered to relate to work performed abroad.
Exercise after departure: May in some cases be non-taxable, but may also be subject to taxation of potential gain at departure depending on the value and tax status.
How are cash-based incentives held by an internationally mobile employee taxed?
Cash-based incentives that relate to employment activity in Norway are normally taxable even if received after departure. There may be exceptions.
What trends in incentive plan design have you observed over the last 12 months?
Due to increasing taxation of ownership income (shares etc.), now at 30.59 % (proposed increased to 31.68 % for 2019), derivative incentive plans are becoming more popular, as they are taxed at a flat rate of 23 % (proposed reduced to 22 % for 2019).
What are the current developments and proposals for reform that will affect the operation of incentive plans over the next 12 months?
Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain right of shareholders in listed companies is expected to be implemented in Norwegian law spring 2019. However, it is not likely that the implementation will affect the operation of incentive plans directly.