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Norway: Proposal for withholding tax on interest and royalty payments

Norway: Proposal for withholding tax

The Norwegian Ministry of Finance on 27 February 2020 issued a public consultation paper that proposes to introduce a withholding tax regime on interest and royalty payments made to related parties. The Ministry of Finance also is considering whether to introduce a withholding tax on certain lease payments.

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  • The withholding tax rate would be 15% of the gross amount of the payment, unless an applicable income tax treaty provides a lower rate of withholding.
  • The withholding tax measures are proposed to be effective 1 January 2021. Accordingly, payments made as of January 2021 would be subject to the withholding tax.

The deadline for submitting comments regarding the public consultation is 27 May 2020.


Overview

The withholding tax on interest and royalty payments would be imposed on interest payments made to related parties that are residents in "low-tax jurisdictions" and on royalty payments made to related non-resident parties, a rate of 15%.

Another consideration of the consultation paper is whether a withholding tax would be imposed on certain lease payments made to related and non-resident parties.

The proposal reflects many of the recommendations made by the Tax Commission in its 2014 report. A principal purpose of this withholding tax regime would be to address base erosion and profit shifting away from the Norwegian jurisdiction.


Interest payments from Norway

Under the proposal, payments of interest made from Norway to related parties that are residents of “low-tax jurisdictions” would be subject to withholding tax at a rate of 15%. The proposal would supplement the existing interest deduction limitation rules and could limit tax deductions for interest payments made by certain Norwegian entities.

The term “low-tax jurisdiction” reflects current treatment under the tax exemption method and the controlled foreign corporation (CFC) rules—i.e., a jurisdiction is considered to be a “low-tax jurisdiction” when the effective taxation at the level of the creditor is lower than two-thirds of the taxation that the creditor would have paid if it were a resident of Norway. There is a “black list” of low-tax jurisdictions that is binding, and a non‑binding “white list” of jurisdictions having sufficient taxation levels issued annually by the tax administration.

For these purposes, parties are considered to be related if there is a direct or indirect ownership of 50% or more between the parties, or one of the parties has the equivalent level of control.  Under the latter condition, the assumption is that the controlling company is able to affect decisions related to the financial arrangements between the parties.  


Royalty payments from Norway

The proposal also includes a proposal for a 15% withholding tax on payments for the right to use intangible assets (royalty) made between non-resident related parties, regardless of the effective taxation at the level of the recipient of the royalty payment. Some typical examples of royalty payments include payments made for the lease and use of intangible assets including intellectual property rights, patents, and licenses.

In contrast to interest payments, the Ministry of Finance did not find reasons for limiting royalty payments to related companies that are residents in low-taxed jurisdictions.


Lease payments for certain tangible assets

The Ministry of Finance is also considering a withholding tax on lease payments for certain tangible assets—thereby effectively extending the royalty definition to include payments for the use of commercial and industrial equipment. In particular, this proposal could apply to a lease of capital-intensive and mobile tangible assets such as vessels, rigs, and aircrafts. The proposal would limit the imposition of withholding tax on lease payments made to related and non-resident entities.


KPMG observation

The Ministry of Finance has not yet decided whether it will propose the withholding tax on lease payments for certain tangible assets, but may consider this withholding tax depending on the comments submitted during the public consultation process.

If introduced, this withholding tax would affect, among other industries, the shipping and offshore sector as well as the aviation industry and intra-group bareboat or dry-lease arrangements.


EU/EEA residents

A withholding tax regime must allow for the fundamental freedoms under EU law. In order to satisfy Norway’s obligations under the EEA-agreement, the Ministry of Finance has proposed an alternative method for entities that are residents in EU Member States or EEA countries.

Entities that are residents and that conduct “genuine economic activity” within EU/EEA could possibly be subject to the Norwegian withholding tax based on a net method (that is, taxed at the statutory income tax rate of 22% after deducting costs directly connected to the loan or lease arrangement). In the event the non-resident elects for the net method treatment, a tax return would have to be filed in Norway.


Tonnage taxed entities

Under the current proposal, taxpayers subject to the Norwegian tonnage tax system would be exempt from withholding tax on interest and lease payments.


For more information, contact a KPMG tax professional in Norway:

Per Daniel Nyberg | +47 40 63 92 65 | per.daniel.nyberg@kpmg.no

Thor Leegaard | +47 40 63 91 83 | thor.leegaard@kpmg.no

Anders Liland | +47 40 63 91 88 | anders.liland@kpmg.no

Pål-Martin Schreiner | +47 40 63 45 26 | pal.schreiner@kpmg.no

Lene Lodde | +47 40 63 95 98 | lene.lodde@kpmg.no

Ole Jørgen Bekkedal | +47 99 01 91 91 | ole.jorgen.bekkedal@kpmg.no

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