In a recently published binding advance ruling (BFU) from the Norwegian Tax Administration, we gained insight into what triggers the shift from passive capital management to business activity in the context of property development for tax purposes.
Do you own a large plot or property and are considering developing it? Then you should take note of this ruling—it could be highly relevant for how your profit will be taxed.
The question considered by the Tax Administration: The Administration assessed whether the gain from a property project should be considered business income under Section 5-30 of the Tax Act, or capital income under Section 5-20.
Background and facts of the case
Two siblings inherited a 2-decare (2,000 m²) property in 2022, including a single-family home and a garage. The appraised value was NOK 24 million. The owners wanted to develop the property by subdividing it into three separate plots, with the following plan:
- A 363 m² plot to be sold to a neighbour.
- A new single-family home to be built on an 800 m² plot and sold.
- The original home to undergo surface renovation and be sold along with the remaining 900 m² plot.
The project was scheduled to span several years, assuming all necessary approvals from relevant authorities were obtained. The total estimated workload for completing the project was 61.5 man-months.
Tax Administration's assessment: Capital income or business income?
The key question the Directorate examined was whether the planned activity qualified as business activity under Section 5-30, or as capital income under Section 5-20 of the Tax Act.
Although "business activity" is not legally defined, legal and tax practice has established that it requires a certain duration and scope, must be capable of generating profit, and be conducted at the taxpayer’s own expense and risk.
The Directorate particularly emphasized the following factors:
- Scope and Duration: The activity started in 2022 and is expected to continue at least until 2026, amounting to more than five years of full-time work.
- Profit Potential: An expected sale price of NOK 30–40 million indicates a clear financial motive.
- Owner’s Responsibility and Risk: The owners are managing the process themselves and bear the financial risk, even though contractors and real estate agents are involved.
- Overall Assessment: The activities were not considered in isolation but as part of a comprehensive process.
Based on these points, the Directorate concluded that the profit from the sale should be taxed as business income, not capital income.
Previous practice supports the assessment
According to the Norwegian Tax ABC, Section V-9-3.4.8, “Planning and construction of one or more buildings at one’s own expense and risk with the intention of resale will [often] constitute an activity of such scope and duration that the criteria for business activity are met.”
The Directorate referred to prior case law, including the Supreme Court case Rt. 1967/1570, where the construction and sale of two triplex houses were deemed a business activity and considered to go “well beyond a typical capital investment.”
The Directorate did not set a minimum threshold for what qualifies as a business activity but emphasized that the activity must be considerably more extensive than a regular sale.
Another relevant case is a 2009 ruling from the Agder Court of Appeal, where the construction and sale of a single vacation home was considered a business. Even in the absence of a formal business structure, the court emphasized the scope, commercial character of the activity, and the landowner’s industry experience and network, even though the person was not directly tied to their separate business (a limited company involved in cabin construction).
What does this mean for you?
If you own property and are planning to:
- Subdivide land
- Build a new house
- Upgrade an existing home
- Sell one or more parts for profit
…you must evaluate whether this collectively constitutes a business activity. If the planned project qualifies as business income, the tax burden will be higher than if it qualifies as capital income, which is taxed at 22%.
Business income is subject to additional charges, including social security contributions, bracket tax, and potentially top tax, which can result in a significantly higher effective tax rate.
It is therefore crucial to assess whether your planned development exceeds the threshold for being considered business activity. Misjudging this could lead to a much higher tax bill than anticipated.
Summary and recommendation
The Norwegian Tax Administration concluded clearly: When planning, subdivision, construction, and sale are carried out at one's own expense and risk — and the activity has the scale and duration seen here — then it constitutes a business activity. The profit was taxed as business income, not capital income
Do you need assistance evaluating the tax implications of a property development project? Get in touch—we help with everything from strategic planning to tax optimization.
