What is Fritaksmetoden (Participation Exemption)?

Fritaksmetoden (the exemption method) is the cornerstone of the Norwegian corporate group tax system. Without it, corporate group profits would face double or triple taxation as dividends passed up a chain of holding companies, each paying corporate tax. Fritaksmetoden solves this problem by exempting most inter-company dividends and share gains from corporate tax.

**Who qualifies?**

Fritaksmetoden applies when the shareholder (the dividend recipient) is: - A Norwegian AS, ASA, or comparable Norwegian entity - An EEA-resident company that is comparable to a Norwegian qualifying entity AND not established in a low-tax country

The investee company (the dividend payer) must be: - A Norwegian AS or ASA - An EEA-resident company (not in a low-tax jurisdiction)

Non-EEA companies, and EEA companies in jurisdictions classified as 'low-tax' by Norwegian standards, are excluded. Norway defines a low-tax country as one where the effective tax rate is less than two-thirds of what it would be in Norway (i.e., effective rate below ~14.67%).

**The 3% rule**

Despite the exemption, 3% of dividends received under Fritaksmetoden is always included in the Norwegian recipient's taxable income (alminnelig inntekt) and taxed at 22%. The rationale is a flat-rate disallowance of costs attributable to holding the investment (the 'FIFO rule' logic). The result: a NOK 1,000,000 dividend produces NOK 30,000 taxable income → NOK 6,600 tax → effective rate 0.66%.

This 3% rule does NOT apply to capital gains on shares — gains from selling shares in qualifying companies are 100% exempt. The 3% rule only applies to dividends received.

**Practical implications — holding company structuring**

Fritaksmetoden makes the holding company (holdingselskap) structure extremely powerful for Norwegian business owners: 1. Operating company (Drifts AS) earns profit and pays 22% selskapsskatt. 2. Drifts AS pays dividend to Holding AS — only 0.66% effective tax under Fritaksmetoden. 3. Holding AS accumulates capital at approximately 22% corporate tax, sheltered from further tax until the personal owner takes dividends. 4. When the personal owner takes dividends from Holding AS, the Aksjonærmodellen applies (37.84% on amounts above skjermingsfradrag).

This deferral of personal dividend tax while capital accumulates is the primary driver of the holding company structure in Norway.

**Capital gains**

Gains on selling shares in qualifying companies to a Norwegian AS are 100% exempt (no 3% rule). This makes selling a subsidiary tax-free at the corporate level, enabling tax-neutral restructuring.