NORWAY: BUDGET 2016; MORE ABOUT PROPOSED TAX REFORM
The Norwegian conservative government on 7 October 2015 published both the proposed state budget for 2016 and a “white paper” containing proposals for tax reform. The proposed tax reform in the white paper is a follow-up action from a report on tax reform, presented by the Tax Commission in late 2014.
In general, the 2016 budget retains the main characteristics of the current corporate income tax system. The government also indicated it would continue:
- The system of treating debt and equity differently for tax purposes
- Applying the arm’s length principle as the most appropriate principle for transfer pricing purposes
- Maintaining the Norwegian exemption method, but with certain minor amendments
The government indicated its plans to introduce Norwegian rules on country-by-country reporting, in accordance with recommendation from the OECD’s base erosion and profit shifting (BEPS) project.
REDUCTION OF CORPORATE TAX RATE
The general income tax rate would be reduced from 27% to 25%, effective from fiscal year 2016. The reduction would affect both corporate taxpayers as well as individual taxpayers.
Further, a corresponding increase in the special petroleum tax to 53% is proposed, maintaining the marginal tax rate of 78% for E&P companies. Read TaxNewsFlash-Europe
With respect to corporate taxpayers, the 2016 budget recommends a further reduction of the corporate tax rate to 22% in the next few years. The recommendation is in line with recommendations in the 2014 tax reform report from the Tax Commission. The intention would be to reduce the tax rate to a level comparable to that of neighboring Scandinavian countries (Denmark and Sweden).
Hence, further reductions in the corporate income tax rate need to be monitored in light of international developments.
MORE RESTRICTIVE INTEREST LIMITATION RULES
One area of uncertainty prior to the release of the 2016 budget was what would be the government’s response to the Tax Commission’s proposal for significant changes to the current interest limitation rules.
The current interest limitation rules were effective from fiscal year 2014 and generally limit intra-group interest expenses to 30% of “tax EBITDA” (taxable result less net interest expenses and tax depreciation). The rules do not apply if the net interest expense (both intra-group and third-party) does not exceed NOK 5 million (this is a “de minimis threshold”). The main purpose of the rules is to prevent profit shifting through interest deductions.
The proposed budget does not incorporate these changes, but proposes to reduce the basis for deductible interest from 30% to 25% of EBITDA.
Referring to the 2014 proposal and to the OECD’s work in connection with base erosion and profit shifting (BEPS), the position of the Norwegian government is that the current interest limitation rules still provide opportunities for profit-shifting. According to the government, extending these rules to apply to both internal and external lenders must be examined and evaluated in light of BEPS project and recommendations. Thus, the government has proposed that the interest limitation rule on interest expenses would also cover interest on external debt.
DOMESTIC WITHHOLDING TAXES: INTEREST, ROYALTY AND LEASE PAYMENTS
The Tax Commission’s 2014 report on tax reform recommended that withholding taxes need to be implemented and applied on interest and royalty payments. A “royalty” would include lease payments on certain tangible assets, such as bare-boat rentals of vessels and rigs.
These recommendations were not proposed in the 2016 state budget, but the government’s white paper proposal for tax reform maintains that withholding taxes need to be reviewed in more detail, including withholding taxes on lease payments. It is expected that the Ministry of Finance will prepare a discussion paper for public consultation.
The government also stated that potential implementation of a withholding regime would need to be as extensive as possible, taking into account restrictions under EEA / EU law, and that the review must consider whether income from bare-boat leasing of vessels and rigs would be denied under the tonnage tax regime, to allow for withholding tax on such payments.
Currently, in Norway, there is no domestic basis to levy withholding taxes on any payments other than dividend payments. As a consequence, Norwegian tax treaty policy has been to exempt interest and royalty payments from any taxation at source. Most double tax treaties currently in force, therefore, exempt any payments form withholding tax and would have to be renegotiated in order for a domestic amendment to be effective. EEA / EU law would also affect the application of any domestic amendments.
The existing withholding tax on dividends would be maintained.
GENERAL ANTI-AVOIDANCE RULE
Under current domestic law, a general anti-avoidance standard developed by the courts exists, and under this standard, transactions that are undertaken with little or no other purpose than avoiding tax may, under certain circumstances, be disregarded for tax purposes. The standard currently has broad application. The government’s view is that this general standard must be codified in the Norwegian tax law, and to this end has initiated a process to review and prepare a proposal for a legislative amendment.
AMENDMENTS TO THE EXEMPTION METHOD
Proposed amendments include that, effective from 1 January 2016, Norwegian shareholders would be denied tax exemption in instances when the foreign distributing company is entitled a deduction for the distribution (typically because the payment is classified as interest in such jurisdiction). Additional hybrid mismatch rules could be investigated further.
The government has indicated it would maintain the current Norwegian exemption method for cross-border share income, and would investigate how the qualification criteria for foreign companies could be simplified.
TAX RESIDENCE IN NORWAY
Under the current domestic law, a company is considered to be a tax resident in Norway based on an overall assessment, but the key element has been whether the company is effectively managed from Norway or not. The government has proposed that all companies incorporated in Norway must always be considered to be a tax resident in Norway for domestic law purposes.
Tax depreciation of assets and acquired goodwill is based on an annual declining balance methodology. The government has proposed to decrease the depreciation rates for certain assets, as follows:
- Vessels, rigs, and similar assets, with the current rate of depreciation of 14% to be reduced to 10%
- Hotels, pubs, and similar assets, with the current rate of depreciation of 4% to be reduced to 2%