The Norwegian Parliament approved the act implementing directive 2002/47/EF on Financial Collateral Arrangements, which will be in effect as of July 1 — a vote of confidence that is likely to promote the growth of securities lending and borrowing in that country.
As a result, Norwegian investors may now accept collateral in the form of transfer of right and title as an alternative to cash collateral or a pledge.
When complying with the provisions under the new Section 9-11 of the Tax Act, securities lending will not be considered as realization imposing tax obligations on Norwegian taxpayers as a result of the Parliament’s action. If borrowing Norwegian securities from a Norwegian lender, the Norwegian lender will claim that the transaction is marked as lent securities with the Norwegian Central Securities Depositary (the VPS), and request a return of the lent securities no later than the last day of the year, i.e. 31 December.
In the case of a Norwegian lender, the Norwegian tax authorities will claim that the transactions might be considered as realization of the lent shares should these provisions not be complied with, according to an interpretation of the new law by DnBNOR.
Marking of transactions as being on loan with the VPS cannot be done solely by the lender since marking is a matching criteria in the VPS, implying that the transaction will fail unless both the lender and the borrower mark their orders, DnBNOR said.
With regard to the deduction of withholding tax, the law made this addition to Section 5A of the Tax Payment Act, as follows: a borrower who, according to a securities lending agreement ref Section 9-11 to the Tax Act, is paying dividend compensation as described in the Tax Act Section 10-11, third subsection, to contractual parties tax resident in a foreign country, is obliged to deduct withholding tax of such compensation.”
The scope of each parties’ obligations to deduct withholding tax must be decided based upon an interpretation of Section 5A in the Tax Payment Act.
According to Norwegian law, withholding tax corresponding to 25 % of the dividend paid should be deducted. This applies even if the lender is resident in a country enjoying tax-treaty status with Norway stating a lower level of withholding tax, 25% will be deducted, as the Norwegian borrower (normally) has no information as to whether the lender also is the beneficial owner of the securities.
Furthermore, a foreign lender entitled to a 15% deduction on dividend when registered as shareholder with a Norwegian company, might choose to recall the shares before the ex. dividend date , to avoid an additional 10% cut on dividend payments. If, however, a foreign lender who is entitled to a lower WHT rate still wishes to lend Norwegian securities over ex. dividend date, a tax reclaim for the difference will have to be submitted.
In order to avoid tax, the obligation of Norwegian lenders is to reclaim shares no later than the last day of the year, according to DnBNOR. That rule is established in order to comply with the Norwegian RISK system which the Norwegian government might abolish.
Finally, speaking of taxation on dividend compensation, it is expected that lenders – i.e. companies situated within the European Economic Area – will be treated equally to Norwegian companies. The outline of the new regulation is further described in the extract of the press release issued by the Ministry of Finance on March 26.