Prospecting, exploration and production licences in Greenland are governed by the Act on Mineral Resources (Råstofsloven).
Greenland's oil and gas legislation provides a stable legal structure and a "one door" system of administrating the country's hydrocarbon resources. Run by the Bureau of Minerals and Petroleum (BMP), this system simplifies licence applications and operating conditions in the country.
A prospecting licence is non-exclusive and is normally granted for 5 years for large areas, excluding areas already covered by exploitation licences.
An exploration licence is exclusive and covers specific areas. An exploration licence which delineates a viable hydrocarbon deposit is entitled to a production licence.
An exploitation licence is also exclusive, and will normally cover a restricted area covering only the deposit. Exploitation licences are only granted to public limited companies domiciled in Greenland that can demonstrate the technical and financial capacity required to establish an oil and gas production. An exploitation licence allows the licensee to construct the facilities required for the operations subject to the BMP's approval of the development plan, which must include an environment impact assessment and restoration plans.
Exploration and exploitation licences are granted for a period of up to 10 years or - in some special cases - for a period of 16 years. It may be possible to extend the licence for 3 year periods. However, the maximum licence period is 50 years.
Nunaoil A/S is the national oil company of Greenland and as a carried partner owns 12.5% of each hydrocarbon exploration and exploitation licence in Greenland.
The following is a brief description of the most relevant tax rules in Greenland relating to oil and gas activities and is by no means exhaustive. It would be advisable to obtain specific advice before commencing activities in Greenland in order to avoid any pitfalls and to establish a tax optimal structure, keeping in mind that Greenland has a very limited double tax treaty network.
It should be noted that it is not clear if Greenland's tax legislation applies to all types of activities on the continental shelf, for example, whether prospecting and exploration licences create a permanent establishment, whether farm-out agreements are taxable and whether exploration expenses can be transferred to a Greenlandic company if and when a production licence is granted. Therefore, tax planning regarding entity type set-up, allocation of costs and timing of deductions for expenses in the licence holder's home country and / or Greenland is crucial in order to minimise tax risks and to safeguard the deductibility of expenses.
Denmark*, Faroe Islands, Iceland, Norway, Isle of Man *The scope of the double tax treaty between Denmark and Canada also partly applies to Greenland.
A company is resident if incorporated in Greenland. A global income tax principle applies to resident companies and, as a main rule, income from permanent establishments and foreign real estate must be included in the company's taxable income.
Prospecting and exploration can be carried out by a foreign company with a prospecting and exploration licence in Greenland. Exploitation is only permissible through a public limited company resident in Greenland. As indicated above, any tax issues related to operations in Greenland will depend to a large extent on the specific set-up. This should be kept in mind when considering the legal structure of the operations in Greenland in order to optimise the tax structure on a long-term perspective.
A foreign company that carries out business in Greenland through a permanent establishment is liable to tax on the income attributable to the permanent establishment in Greenland. To determine whether or not there is a permanent establishment in Greenland, the authorities generally rely on the OECD Model Tax Convention. It is not clear if a foreign company would automatically have a permanent establishment in Greenland if it is granted a prospecting and exploration licence. In general, Greenland has a special ring fencing principle according to which the taxable income for several permanent establishments is not calculated as one income, but must be calculated separately. However, special rules apply to companies with licences to explore and exploit hydrocarbons. If specified in the licence, income from several fields may be calculated as one income, whereby losses from one field can be offset against profit from another field.
The corporate income tax rate is 30 percent. Additionally, a surcharge of 6 percent of the tax payable is charged, bringing the total corporate tax in Greenland to 31.8 percent. Companies subject to the Act on Mineral Resources can generally apply for exemption from the surcharge.
Foreign companies which receive dividend from Greenlandic companies are subject to limited tax liability on the dividend. The withholding tax generally amounts to between 37 and 44 percent depending on the fiscal domicile of the Greenlandic distributing company. A special provision applies to companies which are subject to the Act on Mineral Resources according to which the withholding tax rate on dividends is maximised to 37 percent.
Dividend from companies domiciled in Greenland Dividend from companies domiciled in Greenland is taxable for the receiving company in Greenland. Dividend from foreign companies As a main rule, dividend received from foreign companies is also included in the taxable income of the Greenlandic company. However, dividend received from a foreign subsidiary is tax exempt if the Greenlandic parent company has held at least 25% of the share capital in the subsidiary for a continuous period of at least 1 year during which time the dividend was distributed.
A debt-to-equity ratio of 2:1 applies to Greenlandic companies and branches with "controlled debt" to foreign affiliated companies with a de minimis threshold for debt below DKK 5 million. There are no special provisions for oil and gas companies.
Greenland's transfer pricing legislation applies to related party transactions by Greenlandic taxpayers which are controlled by individuals or legal entities (ownership/control of more than 50 percent of shares/voting power), are part of groups which control legal entities, or have a permanent establishment outside Greenland. The transfer pricing legislation is based on the OECD Guidelines.
In addition to ordinary corporation tax, a licence may be subject to production and field royalty and duties under the Act on Mineral Resources. The terms are outlined in the specific licence. In the Disco West licences from 2006, a production levy is charged as a type of surplus royalty over and above the ordinary corporation tax.
Expenses are deductible in the year to which they relate. Documentation must be prepared to substantiate that the costs for services to affiliated companies are arm's length. Subject to certain conditions, distributed dividend is deductible for the Greenlandic distributing company.
Depreciation rates are: 5 percent on buildings 10 percent on ships and planes 30 percent on operating equipment 100 percent on operating equipment with an acquisition cost less than DKK 100,000 For companies which have been granted exploitation and exploration licences for hydrocarbons, etc., production assets will be regarded as operating equipment. Production assets mean fixed production plants, etc. on land, fixed and mobile platforms with operating equipment and ancillary machines, pipelines, pumps, storage tanks and other equipment. Costs related to building roads, harbours, helicopter landing fields, etc. which may be necessary in connection with test drilling and subsequent production of oil and gas may be deductible in certain circumstances.
Gains on a sale of buildings, vessels or aircrafts may be amortised. The amortisation amount (corresponding to the calculated gain) may be deducted from the balance in one of the three general depreciation categories, provided that the remaining balances remain positive or zero.
Where a taxpayer has calculated a taxable profit, a further 50% tax amortisation of the profit may be possible, provided the remaining depreciation balances remain positive or zero.
Tax losses from a business activity can be set off against positive trading income. As a general rule, losses may be carried forward for 5 years. Companies with licences to carry out exploration or exploitation of hydrocarbons may carry forward tax losses indefinitely. Tax losses carry forward may be capped under change of ownership provisions.
Where losses cannot be offset during the 5-year period, permission may be granted to carry back the losses in the 5 years immediately prior to the loss-making year.
Tax consolidation is not possible.
Binding advance rulings are only granted under limited circumstances regarding specific transactions or arrangements in very special cases.
Greenland has no value added tax system, sales tax, other turnover tax or duties. However, various duties are payable, including special cruise liner tax and port duties.
Further information is available at the Greenland Tax Desk.