Norway: Withholding tax on interest and royalty payments, lease payments for certain physical assets
Norway: Withholding tax on interest and royalty payment
The Norwegian government today proposed a withholding tax on interest and royalty payments.
The Ministry of Finance in February 2020 issued a public consultation paper concerning a proposal to introduce a withholding tax regime on interest and royalty payments made to related parties, and also possibly introducing a withholding tax on certain lease payments. Read TaxNewsFlash
Proposal in 2021 budget
In the Norwegian government's proposal for the 2021 budget (7 October 2020), it is proposed that Norway would introduce domestic legal authority for withholding tax on interest, royalty, and certain lease payments to related entities resident in low-tax jurisdictions. The measures are proposed to have an effective date of 1 July 2021.
The objective of the proposal is to counteract the potential possibilities for related-party transactions that result in base erosion and profit shifting (i.e., tax planning strategies that exploit gaps and mismatches in tax rules to avoid paying tax). Withholding tax is also seen as an important instrument to prevent double non-taxation when the recipient is not taxed in its jurisdiction of residence.
The government proposes a 15% withholding tax rate on the gross payment on interest, royalties, and certain lease payments. The withholding tax rate may be reduced or fully exempted under an applicable tax treaty and when the recipient is genuinely established and conducts real economic activity in an EU Member State or EEA Member State.
Tax professionals expect that the proposal would be passed as proposed, given that amendments made by the Ministry of Finance reflect comments to the public consultation that are viewed as generally taxpayer favorable and therefore the proposal is expected to attain political consensus for the introduction of domestic legal authority for withholding tax in Norway.
Overview of the proposal
Application of the withholding tax
The proposed withholding tax would apply for:
- Interest on related-party debt paid to entities resident in low-tax jurisdictions
- Payments for the use of or the right to use intellectual property rights (royalties) and for certain physical assets to related entities resident in low-tax jurisdictions
The definition of interest and intellectual property rights is proposed to be in line with the definition of these terms in current Norwegian tax law. For financial lease transactions, this implies that such payments would only be subject to withholding tax if the interest element of the lease payment qualifies as interest for tax purposes.
Physical assets that are proposed to be subject to the withholding tax are vessels, rigs, airplanes, and helicopters and generally would correspond with assets depreciated for tax purposes under asset groups in § 14-41 letters e and f of Norway’s general tax law.
For these purposes, entities would be considered related when there is a direct or indirect ownership or control that reaches a threshold of at least 50%, and entities would be considered related if the control/ownership threshold is exceeded at any time during the relevant income year before the payment is recognised.
It is proposed that the low tax standard that applies under the Norwegian controlled foreign corporation (CFC) legislation would also apply when assessing whether an entity is resident in a "low-tax jurisdiction" for withholding tax purposes. Under this standard, an entity is generally considered resident in a low-tax jurisdictions if the effective tax rate of the entity's profits is less than two-thirds (2/3) of what it would have been if it were a resident in Norway.
Other measures in the proposal deviate from the proposal in the Ministry of Finance's consultation paper (February 2020).
- In the consultation paper, it was proposed that royalty and lease payments to related parties resident abroad would be subject to withholding tax. On the basis of responses to the consultation paper, including from the KPMG member firm in Norway, the proposal has been amended to encompass royalty and lease payments to recipients that are residents in low-tax jurisdictions. The stated reason is mainly that the withholding tax needs to target situations when the risk for base erosion and profit shifting risk is perceived as high.
- Further, in the updated proposal, interest and royalty payments to entities genuinely established and conducting real economic activity in an EU/EEA Member State would be exempt from withholding tax. In the consultation paper, the proposed withholding tax provisions would have applied with regard to EU/EEA Member States that, however, could elect for an alternative net taxation method. The scope of the net taxation alternative in the original proposal was unclear, and the original proposal was viewed by tax professionals as not being in accordance with Norway's obligations under the EEA agreement.
Under the proposal, taxes would be withheld by the entity making the interest, royalty or lease payment. The entity with the withholding obligation also would be responsible for assessing whether the withholding tax provisions encompass the payment in question and which tax rate is to apply (e.g., if a lower rate is available under an income tax treaty). If the recipient's tax status is unknown, 15% of the payment would be withheld. The duty to withhold taxes is not limited to ordinary cash payments, but also include interest, royalty, and lease payments accrued or settled in different manners.
If the withheld tax exceeds the statutory rate or the withholding tax rate under an applicable tax treaty, it would be possible to claim a refund. To file a refund claim, an appeal would have to be filed within the three year statutory deadline.
Interplay with interest limitations under earnings stripping rules
The deduction of net interest expenses above NOK 25 million would, with certain exceptions, be broadly limited to 25% of tax EBITDA (earnings before interest, tax, depreciation and amortization). It is proposed that withholding tax on interest payments would be imposed regardless of whether the taxpayer making the payment could deduct the interest payments or whether interest deductions would be limited under the earnings stripping rules. Hence, withholding tax could be levied on interest paid to a foreign related entity, even though the Norwegian entity would not be eligible to a corresponding interest deduction for tax purposes.
Leases of certain tangible assets
A withholding tax is also proposed on bareboat or dry-lease payments for ships, vessels, rigs etc., airplanes, and helicopters to related entities that are residents in low-tax jurisdictions.
The Ministry of Finance however decided not to propose to limit the withholding tax obligation to a specific type of leasing contract, as this could encourage tax planning. The Ministry of Finance emphasized that in situations when the lease contract includes more than the asset itself (e.g., services or crew), it would be assessed on the specific facts for the part of the payment that is to be deemed to constitute payment for the asset itself and this amount would be subject to withholding tax.
The Ministry of Finance stated that lease payments for assets taxed under the Norwegian tonnage tax regime would be exempt from the withholding tax. However, lease payments for similar assets that are not taxed under the Norwegian tonnage tax regime would be subject to withholding tax.
Proposed effective date
The effective date is proposed to be 1 July 2021. All payments that would be covered by the proposed withholding tax provisions and that are paid after the effective date would be subject to withholding tax.
For more information, contact a KPMG tax professional in Norway:
Per Daniel Nyberg | +47 40 63 92 65 | firstname.lastname@example.org
Thor Leegaard | +47 40 63 91 83 | email@example.com
Anders Liland | +47 40 63 91 88 | firstname.lastname@example.org
Pål-Martin Schreiner | +47 40 63 45 26 | email@example.com
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