All questions
Overview of recent activity
The Norwegian economy as a whole as well as its asset management industry are affected by the Norwegian oil and gas sector, as well as by a state active in the financial markets. The Norwegian state has substantial net financial assets in its sovereign investment fund, the Petroleum Fund (see Section VI.vi). The oil and gas sector benefits the mainland and public economy in terms of both industrial activity and tax revenue and has made Norway (relative to its size) a relatively attractive investor market for both foreign and domestic asset managers.
Norway is a relatively small market, and the number of Norwegian managers of private funds is relatively low. This entails relatively large variations in fundraising year on year. After record fundraising levels in 2021, with 34.4 billion kroner, the fundraising level decreased to 27.5 billion kroner. Deployed capital by Norwegian managers reached record levels during 2021, reaching a total of 18.5 billion kroner. This has kept a steady pace, reaching 18.8 billion kroner during 2022. In contrast, divestments have continued to shrink from 2020 through 2022 in a climate of several market uncertainties.
The Norwegian mutual funds market is dominated by a small number of large managers, such as the major banks and credit institutions present in Norway: DNB, KLP, Storebrand (including Skagenfondene) and Nordea. Together these represent approximately 68 per cent of total assets under management. The covid-19 pandemic spurred significant growth in subscriptions to mutual funds as both existing and new investors in the retail segment prioritised savings and investments in liquid assets.2 The trend has abated since, with higher market volatility, geopolitical issues and increasing cost of living reducing savings potential. No new hedge funds managed by Norwegian managers have been established for a number of years, and the market appetite for such funds is seemingly low.
Unregulated closed-ended funds make up a significant portion of collective investments in Norway in both the retail and professional markets. This is particularly the case within real property investments. According to the regulator, such funds were, at the end of 2022, the second largest type of alternative investment fund (AIF) in Norway with approximately 95 billion kroner under management behind funds of funds with approximately 123 billion kroner under management, where funds of funds saw a decrease of 5 billion kroner from the year before.3
General introduction to regulatory framework
Norway is a Member State of the European Economic Area (EEA), and the main body of legislation regulating asset management consists of EU legislation implemented in Norwegian law.
Mutual funds fall within the scope of the Norwegian Investment Fund Act (IF Act). As a general rule, all open-ended funds investing in financial instruments4 and/or bank deposits, including mutual funds that are undertakings for collective investment in transferable securities (UCITS) funds,5 fall within the scope of the Norwegian Investment Fund IF Act. Managers of non-UCITS mutual funds exceeding the threshold values of the Alternative Investment Fund Managers Directive (AIFMD) (€100 million under management) are regulated by the Norwegian Alternative Investment Fund Manager Act (AIF Act), implementing the AIFMD, meaning that such managers must be authorised AIF managers (AIFMs) and comply with the AIF Act. Sub-threshold managers may ‘opt in’ to benefit from the marketing provisions of the AIF Act in other EEA jurisdictions.
Closed-ended funds and open-ended funds investing in asset classes other than financial instruments and bank deposits (e.g., real property and commodities (directly and not in derivatives)) generally fall outside the scope of the IF Act. All funds other than mutual funds regulated by the IF Act are currently unregulated (at the fund level) in Norway, save for European venture capital funds (EuVECAs), European social entrepreneurship funds (EuSEFs) and European long-term investment funds (ELTIFs). Management and marketing of shares in AIFs are regulated under the AIF Act.
The AIF Act and the implementation of the AIFMD in Norway are, to a large extent, based on a copy out approach, with little to no ‘gold-plating’. Norway has implemented the private placement provisions of the AIFMD in respect of funds or managers, or both, established outside the EEA. On this point the rules are somewhat more strict than under the AIFMD, as they require prior authorisation from the Financial Supervisory Authority of Norway (FSAN) to market, rather than relying on notification. For fund managers established outside the EEA, there is a requirement that they be registered with a competent authority and subject to prudential supervision in their home state for the purposes of asset management. The rules on cross-border distribution of funds and pre-marketing have been adopted but have not entered into effect. Arguably, these rules may well be gold-plated, in that they do not allow for non-EEA managers to pre-market interests in funds managed by them. The pre-marketing provisions will not be available for registered EEA managers.
Individual portfolio management is an investment service under the Securities Trading Act (ST Act) (implementing the Markets in Financial Instruments Directive (MiFID) II).
Only investment firms and credit institutions authorised under the ST Act, management companies for mutual funds or AIFMs authorised to provide portfolio management (as an ancillary service) may provide individual portfolio management services.
Activity falling within the scope of the IF Act, the AIF Act and the ST Act is under the supervision of the FSAN.
Common asset management structures
Collective investment schemes established in Norway fall either within the IF Act or outside specific regulation (at the fund level), unless registered as an EuVECA, EuSEF or ELTIF fund.
Funds that are regulated under the IF Act are required to be organised as contractual (rather than corporate) mutual funds under that Act. This is a specific form of organisation that implies a high degree of connectedness between the management company and the funds managed by such a company. For example, unitholders in the funds are entitled to elect a number of members of the board of the management company (and the management company is obliged to appoint these board members). The fund has a legal personality, but all dispositions must be taken by the management company.
Unregulated (closed-ended) funds are typically organised as corporate structures (private limited companies)or silent limited partnerships.
Individual portfolio management is mainly offered to institutional clients (pension funds) and high net worth investors through private banking offerings. The structuring of investments will typically be bespoke and adapted to the client at hand. Smaller client portfolios are mainly managed as model portfolios offered to groups of clients.
In the retail segment, significant amounts are invested through unit-linked insurance policies. Several Norwegian insurance companies offer unit-linked life insurance, which offers policyholders the opportunity to invest in a number of assets (although mainly mutual funds and listed instruments) as underlying in a unit-linked insurance contract. Tax rules make holding investments through a unit-linked insurance policy more favourable (for private individuals) compared with holding these investments directly or through mutual funds. Insurers generally provide web-based tools for investors to monitor and make changes to their portfolios without triggering taxation. Changes to the applicable tax rules have been introduced to avoid different tax treatment of what – in substance – are similar-type investment products that require that the relevant unit link policy has a larger insurance element (payout equal to 150 per cent, compared with 101 per cent). If the insurance element is below 150 per cent, taxation will be equal to investing in mutual funds directly. Rules for an ‘equities savings account’ provide more favourable tax treatment of securities accounts of private individuals containing only equity instruments and equities mutual funds compared with direct investment. Investments are made directly in the name of the investors (as is the case for individual portfolio management) and may be offered by credit institutions, investment firms and management companies for mutual funds.
Main sources of investment
Apart from institutional investors, high net worth individuals, family offices and retail investors, the Norwegian government is also a sizeable investor in the Norwegian financial markets in listed securities, private equity, and the venture and seed segment.
The government-owned investment company Argentum Fondsinvesteringer AS and its affiliates are the government’s investment company specialised in private equity investments, with approximately 14 billion kroner under management at the end of Q3 2022. In 2019, the government established a seed fund initiative through Innovasjon Norge (a government-funded initiative for the development of Norwegian businesses). Alliance Venture Spring and ProVenture Management have been appointed as the managers for the new seed funds, which are now (since May 2020) administered by Investinor. Each fund will have commitments equal to approximately 500 million kroner, of which 50 per cent will be subscribed by the government.
Retail investors represent large investments indirectly as members of defined contribution pension schemes, typically with individual investment choice and individual pensions savings.
Key trends
i Focus on fees and costs
Several trends and supervisory actions have led to increased focus on the level of fees in investment products. In 2022, the FSAN conducted a survey of mutual fund fees after the entry into force of the inducement rules under MiFID II, addressing the fact that the reductions in inducements offered by distributors have not been reflected fully in reduction of management fees.6 The report was quickly followed up by a proposal for a ban on inducements, currently being reviewed by the Ministry of Finance after a public consultation.7
Earlier, the FSAN compelled DNB Asset Management (the asset management arm of Norway’s largest bank) and Nordea to take fee cuts on some of their mutual funds found by the FSAN to be ‘closet index funds’, where the investment activity did not provide investors with any realistic chance for higher returns. Forbrukerrådet spearheaded a class action lawsuit against DNB claiming damages on behalf of 150,000 investors in such funds, resulting in damages awarded to the investors when the final appeal was turned down by the Supreme Court.
In 2020, the Norwegian Consumer Council also criticised the same providers for favouring their active managed (and higher fee) options to pension clients, steering pension investments from the individual members into higher fee investments. In 2021, the FSAN issued supervisory guidance to the effect that pensions providers must treat fees in fund investments linked to pensions as own fees and disclose such beforehand (rather than subtracting such fees from the returns of such underlying funds). Industry actors opposed and the Ministry of Finance instructed the FSAN to further assess the question and to submit a proposal for rules. This would primarily affect investments in private equity and venture investments, where the management costs are more uncertain in the longer term with potential carried interest. No proposals have been made yet, but the initiative meshes with the overall focus on fees in investment products and investment funds (see Sections V.i and VII.iii).
ii Regulatory delay – implementation of EU legislation
As a member of the EEA, Norway is required to implement EU financial sector legislation. Following the establishment of the EU system of financial supervision in 2011 with the EU supervisory organisations the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority, holding competences that are partly supranational, the European Free Trade Association and the European Union reached an agreement concerning integration into the EU system of financial supervision, which was approved by the Norwegian Parliament in June 2016. The agreement entails that each single legal instrument must be amended before incorporation into the EEA Agreement, which, in combination with the high level of change in EU financial legislation in recent years, has led to long delays in the implementation of several pieces of EU financial legislation in Norway. The current mechanism does not seem capable of resolving these issues.
Sectoral regulation
i Insurance
Norwegian insurance companies are regulated under the Act on Insurance Activity8 with appurtenant regulations and the Act on Financial Undertakings and Financial Groups. The latter contains the ‘institutional’ rules and capital requirements and, together, these Acts implement Solvency II into Norwegian law.
Rules governing insurance companies’ asset management have been a priority for Norwegian authorities, where Norwegian quantitative investment restrictions have been successively amended for being in breach of the EEA agreement. These restrictions were finally removed in 2018. Currently, the overarching rules implement the provisions on investment freedom and qualitative investment rules (the ‘prudent person principle’) and the risk-based capital requirements under Solvency II.
ii Pensions
Norwegian pensions rules are closely related to labour and tax law. Currently, there are a limited number of collective tax-favourable pension schemes and only one (severely limited) individual tax-favourable pension savings scheme. As in other jurisdictions, defined benefit schemes are wholly eclipsed by defined contribution schemes; there are, in practice, no new defined benefit schemes being established.
All Norwegian employers are required to establish a pension scheme for their employees. Defined contribution schemes may be offered by life insurance companies, pension funds (institutes for occupational pension (IORPs)), credit institutions, UCITS management companies and a specific type of Norwegian regulated entity (defined contribution pensions scheme undertakings).
As of 1 January 2019, pension funds (IORPs) are subject to a Solvency II ‘lite’ framework, with risk-sensitive capital requirements combined with investment freedom. The majority of schemes offer personal investment choice for each employee, typically linked to investments in UCITS funds and similar liquid assets. Otherwise, IORPs are regulated by legislation implementing the EU IORP Directive.
iii Real property
There is no specific regulation of real property funds established in Norway (see Section II). These funds typically fall outside current investment fund regulation (as they are normally closed-ended).
Norwegian real property funds are typically unlisted private limited companies, but public companies also exist.9 The sale of shares in such companies will be subject to public offering rules, and services related to such shares (e.g., brokerage services) are investment services subject to the ST Act.
The management and marketing of real property funds are regulated by the AIF Act. Project finance has been a traditional product in the Norwegian investment market, attracting investors to invest in special purpose vehicles holding typically one or a few capital-intensive assets, often called single asset funds. In 2019, the FSAN issued a circular in which it clarified that it considered most typical project finance and syndicated investments to fall within the definition of an AIF. This means that the special purpose vehicle must appoint a manager that is either registered or authorised. Further, marketing of AIFs to non-professional investors requires prior authorisation from the FSAN. FSAN scrutiny may also entail that some products with imbalanced risk–reward profiles are denied marketing authorisation where the level of costs seems unsustainable against the expected returns.
iv Hedge funds
Hedge funds (special funds) established in Norway may be managed only by management companies authorised under the IF Act, or foreign management companies authorised under equivalent rules in their home state. In practice, only management companies established in another EEA Member State will be eligible. Managers exceeding the threshold values of the AIF Act (€100 million or €500 million under management) must be authorised in accordance with the AIF Act (or local legislation implementing the AIFMD).
The marketing of shares in hedge funds to professional investors is (for above threshold managers) subject to the provisions of the AIF Act. The FSAN has held that the marketing rules of the IF Act apply to the marketing of these funds.
Sub-threshold managers may market shares in hedge funds pursuant to the rules of the IF Act. This requires prior authorisation from the FSAN, and this authorisation may be granted only if, inter alia, an agreement on supervision has been entered into between Norway and the home state of the manager of the foreign special fund, and the foreign special fund and its manager are subject to home state regulation that grants investors in Norway protection at least on par with that offered by the IF Act. In practice, authorisation may be obtained only if the manager is subject to AIFM-level regulation. Norwegian managers have traditionally favoured establishing fund structures in jurisdictions such as Ireland or Luxembourg.
v Private equity
There is no specific regulation of private equity funds in Norway (see Section II), other than EuVECA, EuSEF and ELTIF funds. Private equity funds typically fall outside the IF Act (as they normally are closed-ended). However, the management and marketing of such funds are regulated in the AIF Act.
Norwegian private equity funds are typically organised as limited partnerships under Norwegian law or to establish funds as similar foreign entities (e.g., Guernsey or Jersey limited partnerships).
vi Other sectors
Other than what has been described above, there is no other general regulation of asset management activity in Norway, with the exception of individual portfolio management, which is an investment service subject to the ST Act. Unit-link insurance products may be manufactured only by life insurance companies and are typically distributed by insurance agents (tied insurance intermediaries). Norway has not implemented the EU regulation on crowdfunding service providers for businesses. As a rule, providing and intermediating credit is also a regulated activity, save certain exemptions. Against this background a specific exemption has been implemented for lending-based crowdfunding. Investment-based crowdfunding is subject to the general rules of the ST Act implementing MiFID II. Actors in the lending-based crowdfunding space will become subject to an authorisation requirement under newly adopted loan mediation legislation.
The Government Pension Fund Global: the Petroleum Fund
The Petroleum Fund is a sovereign wealth fund established on the basis of a special act.10 It is not a fund in the traditional sense but a body of assets owned by the government and deposited in an account with the Central Bank of Norway. The Petroleum Fund is not liable to earmarked payments but is a tool for government savings and value preservation.
There has been a broad political consensus concerning a cap on annual use of equal to an estimated return on the investment of the fund. For several years this was set to 4 per cent of the value of the fund, but it was lowered to 3 per cent in 2017. The purpose is to avoid macroeconomic stress and inflation in Norway as a result of excess public spending.
The Fund is managed by Norges Bank Investment Management, a department of the Central Bank. The Ministry of Finance has appointed a strategy council to advise on the investment strategy of the Fund and an ethics council. The investment mandate of the Petroleum Fund has been under continuous development, most recently expanding to real property. Proposals for expanding into unlisted securities have not been acted on, but future initiatives concerning changes to the mandate are to be expected as several stakeholders push for more ‘impact investing’ and more predominant environmental, social and governance, and social responsibility investment restrictions.
Other fund-based public investment schemes
Argentum Fondsinvesteringer AS is an important government-owned private equity investor (see Section IV, above). Investinor AS was established by the government as an investment fund to invest directly in Norwegian businesses with essentially a venture fund investment strategy, investing in the early growth and expansion stage of these businesses. Investinor is the largest investor in the Norwegian venture and expansion market and, as a response to covid-19, provided an additional 1 billion kroner to further investment activity.
Nysnø Klimainvesteringer AS (Nysno Climate Investments) was established in 2017 as a tool for government-backed sustainability investments. The company is 100 per cent state owned and invests both directly and indirectly through investment funds (hereunder the government-backed seed funds). At the end of Q3 2022, its portfolio amounted to 1.7 billion kroner.
Tax law
Taxation of collective investment schemes under Norwegian tax law will depend on whether the scheme is regarded as opaque or transparent for tax purposes. Mutual funds are opaque, whereas private equity funds are organised either as tax-transparent entities (silent partnerships or similar) or opaque entities (limited liability companies). Tax transparency implies that the fund is not a separate taxpayer and that the investors are taxed directly on the profits of the fund.
As a starting point, mutual funds are subject to the general Norwegian corporate tax rules, which imply that they are taxed at a rate of 22 per cent on net income. However, the general participation exemption for income and gains on shares applies to mutual funds, which implies that dividends and capital gains on shares in EU and EEA companies are largely tax exempt (97 per cent tax exempt, resulting in mutual funds being subject to an effective tax rate of 0.66 per cent on dividends covered by the participation exemption). Further, mutual funds are exempt from taxation of capital gains (but not dividends) on shares in non-EU and EEA companies. Mutual funds may also claim a tax deduction for distributions made to investors to the extent that these distributions are taxed as interest income at the hands of the investors (see below for more details). As for taxation of Norwegian investors, the rules imply that distributions from mutual funds with an equities portion higher than 80 per cent are taxed in full as share distributions (i.e., at a rate of 0.66 per cent for corporate investors and 37.8 per cent for individual investors, but in the latter case only to the extent that the distributions exceed a tax-free allowance). Distributions from mutual funds with an equities portion lower than 20 per cent are fully taxed as interest income (i.e., at a flat rate of 22 per cent for both corporate and individual investors). Distributions from mutual funds with an equities portion between 20 and 80 per cent are divided into one part that is taxed as share distribution and one part that is taxed as interest, calculated proportionally based on the value of the fund’s equities portion compared with the total value of the fund at 1 January of the relevant income year (where cash is excluded from the fund’s total value). The simplified rule for determining the fund’s equities portion applies correspondingly for the taxation of any gain upon realisation, however, so that only the mean equities portion in the year of purchase and in the year of realisation is relevant.
The proportion of equity investments of a fund must be reported to the Norwegian tax authorities. Foreign funds will not have an automatic reporting obligation, but they may report voluntarily. If not, the reporting obligation lies with the Norwegian investors. Failing to provide sufficient documentation implies that distributions and gains will be fully taxed as interest income.
Non-Norwegian investors in Norwegian mutual funds and private equity funds organised as opaque entities are subject to withholding taxes in Norway on any distribution of dividends from the fund. The domestic withholding tax rate is 25 per cent but may be reduced to 15 per cent (or lower) in most tax treaties. In addition, corporate investors resident in the EU or EEA may be exempt from dividend withholding tax under specific rules. From 1 July 2021, withholding tax at the rate of 15 per cent is levied on a limited scope of interest and royalty payments to related parties resident in low-tax jurisdictions. Norway does not currently impose withholding tax on capital gains.
Non-Norwegian investors in Norwegian private equity funds organised as tax-transparent entities may have a tax liability in Norway for a fund’s income (irrespective of whether or not the income of the fund is distributed to the investors) due to being deemed to participate in the fund’s business activities that are managed from Norway. However, for corporate investors participating in a tax-transparent fund, their share of any capital gains on shares realised by the fund are normally tax exempt, whereas such investors’ share of any dividends received by the fund are normally taxed at an effective rate of 0.66 per cent. The same 0.66 per cent tax rate applies to distributions from a tax-transparent private equity fund to corporate investors.
Norwegian asset managers (and other financial sector undertakings) are subject to a ‘financial sector tax’ comprising a 25 per cent net income tax rate (i.e., three percentage points higher than the general 22 per cent tax rate) and an increased rate on employers’ social security contributions.
Tax law4
Outlook
i Sustainability
The years 2019 and 2020 saw the adoption of sustainability-focused rules in the financial sector with the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation.
Norwegian managers and advisers are no longer grappling with ensuring practical compliance with the rules. This will increase costs, which are likely, at least partially, to be borne by clients and investors, and generally reduce returns. The rules are intended to reduce greenwashing and increase investments into sustainable sectors – as defined under EU legislation. Asset managers that intend to be in the space of sustainable investments will need to ensure that they have sound and documented investment procedures and make efforts to correctly communicate risks to their clients and investors to avoid unhappy investors and litigation.
ii Costs and fees and inducements
EU authorities, Norwegian consumer authorities and the Norwegian regulator have increasingly addressed the question of fees and costs in investment products, in particular in the retail space. It is likely that the different initiatives will produce legislation that both requires more of managers in terms of may documenting and disclosing fees, both pre-contractually and during the life of a product, and may restrict further the use of inducements to distributors.
Curbs on inducements would have a larger impact on independent asset managers and advisers. Asset managers that are part of banking or insurance groups already benefit from a groupwide distribution that would not require inducements to recruit and incentivise distributors.
iii Windfall energy income and market tensions
The Russian invasion of Ukraine brought with it higher food and energy prices. As an exporter of oil and gas, the Norwegian energy sector has benefitted directly from higher energy prices, but this does not automatically benefit the economy as a whole. Norwegian funds in the mutual fund and private equity fund segments have seen relatively high inflows, but in contrast to the high level of fundraising, the level of deals within private equity has remained comparatively low. Funds with significant dry powder will eventually have to press on in spite of difficulties in getting high confidence in valuations and growth scenarios.
The covid-19 pandemic led to changes in consumer patterns, changes to commercial real property and generally higher cost levels for businesses – a trend that might continue for some time. The FSAN has recently announced that it will conduct a targeted review of loan exposures in commercial real estate, signalling a perceived higher risk level.
