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Norway: Budget 2019—reduced corporate tax rate, amended earnings stripping

Norway: Budget 2019—reduced corporate tax rate

The Norwegian conservative government published a proposed state budget plan for 2019. The key tax proposals include a reduction in the corporate income tax rate to 22% and amendments to interest deduction limitation rules.

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Corporate tax proposals

The 2019 budget includes the following proposals related to corporate taxation in Norway:

  • The statutory corporate income tax rate is proposed to be reduced from the current rate of 23% to 22% in 2019—thus reflecting the trend of reductions in statutory corporate tax rates in jurisdictions that are geographically close to Norway.
  • The petroleum tax and the tax on resource rent from hydropower would be adjusted without any net effect on tax revenues. This goal involves increasing the special tax rate on petroleum income to 56% and reducing the rate for “uplift” (investment-based extra depreciation) from 5.3% to 5.2% per year. The tax on resource rent from hydropower production would increase by 1.3% to 37%. 
  • Proposed changes to the earnings stripping rule—in brief, the proposal aims at expanding the earnings stripping measures to include interest paid to unrelated parties. The proposed rules would only apply with respect to entities that are part of a consolidated group or would have been a part of a consolidated group had IFRS been applied.
  • New rules regarding corporate tax residency
  • While a withholding tax on interest and royalties was not proposed, the Ministry of Finance stated that a proposal will be sent for a public consultation and hearing within 2018 and that the aim would be to propose new rules within 2019.  

Interest deduction limitation also for interest on unrelated-party loans

The Ministry of Finance proposes that the earnings striping rules be extended to include interest on loans from unrelated parties, but only for companies that are part of a consolidated group. The reason for the proposal is the desire to prevent multinational entities from shifting profits out of Norway by way of financial transactions. 

The proposal implies that the tax deductibility of interest costs—interest paid to both to related and unrelated parties—would be limited for Norwegian group companies that have net interest costs exceeding NOK 25 million. If the threshold is exceeded, deductions for net interest cost above 25% of tax EBITDA (earnings before interest, taxes, depreciation and amortization) would be limited. Denied interest costs could then be carried forward for up to 10 years on a first-in first-out basis. 

The rules would primarily be applicable when the group prepares consolidated financial statements that include the company in question. However, the rules would also apply for companies that could be included in the consolidated financial statements under IFRS. This implies that complex assessments required under IFRS would become part of Norwegian tax law.

Exception when Norwegian equity ratio is equal to or greater than the equity ratio for the group

An exception would apply to the proposed earnings stripping rules if the equity ratio is equal to or greater than the group ratio. The exception would apply to companies that are included in a consolidated financial statement prepared under NGAAP, Japanese GAAP, U.S. GAAP, IFRS or the accounting rules in another EEA Member State.

The starting point for the assessment of the equity ratio would be the consolidated financial statement(s) and the accounts of the company.

Taxpayers could fully deduct interest costs if able to document that the equity ratio of the company is not lower than the equity ratio reported in the consolidated financial statement. Alternatively, this calculation could be made collectively for all Norwegian group companies. Under such circumstances, the Ministry of Finance would assume that no profit shifting has taken place. 

Based on the language of the proposal, the equity ratio must correspond to or be greater than that of the group. "Correspond to" means that it must be equal to, but a deviation of 2% would be acceptable. 

If a company claims full deductions based on the exception as a single company, the financial statements of that company would have to be revised and would have to be based on the same accounting principles as those of the consolidated financial statements. The proposal includes certain adjustments that would have to be made to the accounts—both at the company level and at the consolidated level to determine that the equity ratio is comparable.

The consolidated balance sheet would have to be prepared under the accounting principles that apply for the consolidated financial statements. The discussion draft proposes several adjustments that would apply for the consolidation (for example income increases and deductions for goodwill).

Note that interest on debt to related parties that are not part of the consolidated group, both companies and individuals, could be denied if net interest costs exceed 25% of tax EBITDA. A threshold of NOK 5 million per company applies. 

Claiming deductions under the exception—compliance costs

Under the proposal, claiming deductions under the exception could result in comprehensive filing and documentation obligations. 

  • First, it would require that an auditor would have to confirm all amended accounts. This includes any adjustments to the balance sheet required under the proposed provisions. 
  • Second, the consolidated financial statements would have to be confirmed by an auditor. If no consolidated financial statement has been prepared, consolidated financial statements that include all Norwegian entities would have to be prepared and confirmed by an auditor. 

All relevant amounts would have to be stated in a separate form to be filed as an attachment to the tax returns. The attachment would detail all necessary adjustments made in the accounts and would need to be signed by an auditor.

Other changes

Under the current rules, unused interest deductions that are carried forward cannot be used—even if the total amount of the net current year interest costs and the carryforward is below the threshold amount. The Ministry of Finance proposes to repeal this limitation. 

Effective date

If passed by Parliament in December 2018, the rules would be effective as of 1 January 2019, and the assessment of the equity ratio would be assesses on the prior year financial statements (i.e., 31 December 2018 for FY 2019).  

Proposed amendments to tax residency

Under the proposed amendment to the tax residency rules, a company incorporated under the laws of Norway would be regarded as tax resident in Norway, unless considered as tax resident in another country under a tax treaty.

A foreign company with its place of effective management in Norway would under the proposal be regarded as tax resident in Norway. The proposal aligns the interpretation of the term” place of effective management” with the OECD definition, providing that the place of the day-to-day management is increasingly important. For foreign companies, an overall assessment would be necessary, and the assessment would place less emphasis on the place of executive management at the board level. While the most relevant factors are management at board level and daily management, other factors such as key management and commercial decisions necessary for conducting the entity’s business, may also be relevant. 

Comments related to withholding tax on interest and royalties

In December 2014, the “Scheel committee” recommended that Norway to introduce withholding tax on interest and royalties, (including lease payments such as, for instance, with respect to bareboat charters) with a proposed rate of 15%. 

In the budget 2019 proposal, the Ministry of Finance stated that there currently is work being done on a proposal to introduce domestic legal authority for withholding tax on interest and royalty payments—with a public hearing planned within 2018 and with a goal to propose new rules in 2019. Contrary to 2014 report, the budget 2019 does not explicitly include lease payments.  

Indications are that if introduced, withholding tax would be applied as EU/EEA law allows (probably net taxation basis). Note, however, existing tax treaties limit withholding tax on interest and royalties, including the treaties with the other Nordic countries, Luxembourg, and the UK. 

Petroleum tax considerations

Read about proposals in the budget 2019 for the petroleum industry in TaxNewsFlash

 

For more information, contact a tax professional with the KPMG member firm in Norway:

Per Daniel Nyberg | +47 4063 92 65 | per.daniel.nyberg@kpmg.no

Thor Leegaard | +47 4063 91 83 | Thor.Leegaard@kpmg.no

Pål-Martin Schreiner | +47 4063 45 26 | Pal.Schreiner@kpmg.no

Marius Aanstad | +47 4063 95 51 | Marius.Aanstad@kpmg.no

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