Danish tax research adopted in new legislation in Norway

Money from Norway


'Taxation of equaty income'

Peter Birch SørensenIn 2002-2003, Professor of Economics Peter Birch Sørensen took part as a foreign expert in a Norwegian tax commission appointed by the Norwegian government.

The commission’s remit was, among other things, to come up with proposals on how to avoid double taxation on income from joint stock companies, while at the same time ensuring that shareholders would not benefit unfairly in relation to other taxpayers.

Double taxation on income from shares occurs when the company pays corporation tax on its profits and the shareholders pay full personal tax on their dividends and share price gains arising from the profits. Double taxation hampers companies' investments and acts as a disincentive for shareholders to inject equity into the company; instead it encourages companies to finance investment through debt, where interest can be deducted against taxable profits. This can result in excessive debt exposure, making companies vulnerable.

Since 1992 Norway had tried to solve the problem of double taxation through complex rules intended to ensure that personal income tax was not paid on dividends and capital gains on shares when corporation tax had already been paid on the underlying corporate income.

At the same time, the rules were supposed to ensure that principal shareholders who work in their own company, say, as a CEO, were not able to convert a CEO salary, which attracts a high tax rate, to tax-free dividends on shares. The rules did not, however, work particularly well, and in order to find a better alternative, Peter Birch Sørensen initiated a research project. It is the results from this research which have formed the basis of the recommendations from the Norwegian tax commission.


By building on previous results from international tax research, Peter Birch Sørensen came up with a new method for taxing income from joint stock companies.

The method ensures that shareholders do not pay personal tax on dividends and capital gains on shares which lie within a normal return on the value of their shares. On the other hand, full capital income tax is levied on dividends and share price gains above this level. In this way, only corporation tax is paid on the income that lies within the normal interest rate on share capital, thus avoiding double taxation of the normal return on company investments. However, when the sum of the dividends and capital gains on shares exceeds the normal rate of return, both corporate tax and personal share income tax must be paid, so that the total tax rate on earnings above the normal level will roughly correspond to the highest marginal income tax rate. Consequently, principal shareholders cannot gain any extra profit by converting their CEO salary to share dividends.


In 2005, Peter Birch Sørensen published a research article in an international Public Finance journal describing the principle he had devised for taxing income from corporations. The principle was adopted into the Norwegian tax reform which took effect in 2006.

The new tax principle means that to a very high degree debt and equity are treated equally in Norwegian companies. At the same time, it has solved the problem where certain groups of shareholders have been able to convert salaries to share earnings, which attract a far lower tax rate.

Tax policies have a major impact on people’s welfare and are constantly up for debate. It is therefore an obvious topic if you want to carry out socially relevant research. In my own research, I have tried to develop ways of making the tax system more efficient and fairer. My ideas on how to improve the Nordic tax systems are probably the ones which have had the greatest influence internationally.

Professor Peter Birch Sørensen, Department of Economics

In 2011, the Norwegian Ministry of Finance carried out a comprehensive evaluation of the tax reform from 2006 by calling in a number of independent external experts. The Ministry concluded that the new principle for taxation of income from public limited companies (in Norwegian called 'aksjonaermodellen'):
"all in all has functioned as it should."

In 2011, the Norwegian Ministry of Finance carried out a comprehensive evaluation of the tax reform from 2006 by calling in a number of independent external experts. The Ministry concluded that the new principle for taxation of income from public limited companies (in Norwegian called 'aksjonaermodellen'):
"all in all has functioned as it should."

The tax principle is still in force in Norwegian legislation.

Further research

2008-2010 Peter Birch Sørensen took part in the international Mirrlees Review, in which a group of leading international experts, under the auspices of Nobel Laureate in Economics James Mirrlees, set out a number of proposals for how future tax systems should be organised. In their final tax proposal, the group chose to include a variant of the tax principle for share income that Peter Birch Sørensen had put forward in his research article from 2005.

2007-2010 Finance Ministries in Canada, Australia, New Zealand and Sweden invited Peter Birch Sørensen to participate in an investigation of the tax policies in these countries, largely against the background of his contribution to the development of Norwegian tax policy.

2013-2014 Birch Sørensen was part of a new Norwegian tax commission which presented a proposal for a new Norwegian tax reform, but retaining the so-called "shareholder model" for the taxation of share earnings.

Inventor of the “Shareholder Model”

  • a section of Norwegian tax legislation which lays down how income from shares held by private individual shareholders is taxed
  • Tax-exempts the portion of a person’s share earnings that is within a normal rate of return (skjermingsfradrag), which is the equivalent to the yield on investing in bonds
  • ensures that the shareholder is only taxed on the above-normal rate of return, while the normal return is only subject to corporation tax in the company
  • ensures that investments in shares are, as far as possible, treated on an equal footing with investments in bonds and other interest-bearing assets, and that shareholders who work in their own company are neither favoured nor are overtaxed compared to other taxpayers

Was introduced as part of the tax reform in 2006 coming into effect on 1 January 2006.

Wikipedia's mention of the Norwegian shareholder model

The Norwegian Government's assessment of the Birch Sørensen 'shareholder model'

“...the shareholder model as a whole has functioned as intended and we therefore recommend its continued application"

Read more on the Norwegian Government's website.


Neutral Taxation of Shareholder Income, Sørensen P.B., International Tax and Public Finance, 2005.