Oslo – a ‘New World City’

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“’New World Cities’ attract a disproportionate share of global investments as the investors look for value beyond the core group of ‘Established’ and ‘Emerging World Cities’”, states Jones Lange Lasalle (JLL), in its report on globalization and competition released some months ago. The top rank of the JLL Investment Intensity Index, which compares the volume of direct real estate investment relative to the economic size of a city, is dominated by “New World Cities”.
Wednesday, March 9, 2016

While the “Established World Cities” are highly globalized and competitive metropolitan economies with the most settled concentration of firms, capital and talent, and the “Emerging World Cities” are business and political capitals of emerging economies and function as gateways for international firms, trade and investment, the New World Cities have a somewhat different profile. These cities all have robust technology sectors supported by a high quality of life and strong environmental credentials, factors which are increasingly being incorporated, either explicitly or implicitly, into real estate investment strategies, JLL emphasizes.

Oslo is categorized as one of these New World Cities.

The recent years has shown a significate increase in foreign investors entering the Norwegian real estate market, including big players such as Starwood, Mayer Bergmann, Blackstone and Madison, corroborating the conclusions in JLLs report.

Legal framework 

From a legal perspective, the market for both sale/purchase and lease of commercial real estate in Norway is characterised by the important role of the background law and a widespread use of standardised agreements.

Professional parties may opt to waive most of the applicable background law in the transaction agreements. However, as is normal in the Norwegian legal tradition, the background law will still be applied as required to fill in any unregulated areas in the agreements and will also affect the interpretation of the agreement. The Norwegian contracts for both lease and for sale/ purchase of real estate are less comprehensive than its equivalents in for instance common law jurisdictions.

Most of both lease and sale/purchase contracts are based on standard terms, although with individually adjusted to reflect negotiations. The standard agreements can be said to be “agreed documents” within the industry, although they are generally somewhat lessor and seller biased.

Deal structure

Capital gains on the sale of shares in a Norwegian limited liability company (Norwegian: “Aksjeselskap”) are tax free for a EU resident corporate shareholder. Asset sale on the other hand is taxable with 25% of the gain. In addition, an indirect transfer of the property by way of transfer of the shares in a real estate owning company will not trigger stamp duty on the property, as opposed to a direct sale of the property. The stamp duty is 2.5% of the market value of the property. For this reason, around 90% of the commercial real estate transactions in Norway are structured as sale of the shares in single purpose holding companies owning the relevant real estate asset. The purchase price is based on the property value, adjusted for any other assets held by the holding company, less any liabilities.   

A common way for foreign investors to structure their real estate investments in Norway is to establish a Norwegian acquisition vehicle in the form of a limited liability holding company. This holding company will acquire the shares of one or more property-owning target companies, often financed by way of a loan from the foreign investor as interest payments are to a certain extent deductible, while no withholding tax are levied on the outbound interest payments, according to current legislation.

The acquisition vehicle will incur tax deficits as a result of deductible interest which, in turn, can be utilised by group contributions received from the target company. The group contributions will generally be deductible for the target company, and taxable for the acquisition vehicle. The group contributions will therefore serve to neutralise the taxable income from the property owned by the target company.

The interest on the loan from the foreign investor to the acquisition vehicle will be deductible to the extent that the equity ratio and the interest rate are at arm’s length and that the net interest amount is within the interest deduction cap introduced in 2014 (MNOK 5). The application/effects of the Norwegian limitation rules for deduction of interest for tax purposes will have to be assessed on a case to case basis.

About us

  • Steenstrup Stordrange is one of Norway’s largest full-service law firms
  • Recent years have seen a strategic realignment to strengthen our focus on corporate advisory, transactions, finance, healthcare/life science and corporate real estate
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  • Our commercial real estate team has comprehensive knowledge and considerable experience in advising foreign investors entering into the Norwegian commercial real estate market 

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Jens Aas
Jens Aas
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Oslo
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