The Kruse Smith model resurfaced after three months

On 1 January 2022, the Norwegian Tax Directorate issued two statements regarding the tax treatment of share incentive schemes offered to employees, one of which threatened the existence of a widely used Norwegian share incentive scheme referred to as the “Kruse Smith model”. Luckily, the Norwegian Tax Directory on 28 March 2022 issued a statement redacting its position in the statement of 1 January 2022. 

The “Kruse Smith model” is named after the Kruse Smith judgment of the Norwegian supreme court in 2000, where Kruse Smith employees were given the opportunity to acquire shares at market value, but with an upfront payment consisting around 10% of the assumed market value of the shares. The remaining 90% would only be payable if the shares were disposed of with a gain. In the event the disposal would result in a loss, the remaining 90% would be forgiven, in part or in full, by Kruse Smith (hereinafter referred to as the “discounted amount” or “discount”). It was decided by the Supreme Court that the benefit obtained by the employee by only having to make an up-front payment of 10% of the share value, would not subject the full “discount” to tax as employment income (salary). 

Since then, the Kruse Smith ruling has inspired share incentive schemes which have been widely used throughout Norway. On 1 January 2022, the Tax Directorate stated that in order for the discount not to be considered employment income for tax purposes, the repayment of the discounted amount would have to be “unconditional” when the shares were acquired by the employees. Thus, in cases where it would be decided that the employer company was to forgive the repayment of the discounted amount in the event that the disposal results in a loss, this would trigger immediate salary taxation on the discounted amount (+ payroll taxation of 15%), already when the shares were purchased. This statement was criticized and debated among Norwegian tax professionals. 

However, on 28 March 2022 the Tax Directory changed its view. The Directorate's new statement of 28 March 2022 replaces the statement of 1 January 2022, and contains important clarifications on the significance of debt forgiveness agreements using the Kruse Smith model:

"In the Kruse Smith judgment, the Supreme Court ruled that there was a credit facility in place. In the view of the Directorate of Taxes, the credit facility must be treated as a regular loan note. The note is thus considered part of the consideration for the shares."

When applying the Kruse Smith model, there will thus be no taxation on the discounted amount at the time of purchase, contrary to the statement of 1 January 2022. The Directorate further indicated that this applies regardless of how the credit facility is referred to by the parties (loan, consideration, residual purchase price, etc.). Gains from subsequent disposals of the shares will normally be taxed as capital income.