In line with recent developments in other European countries, Norway’s proposal would limit intra-group loan interest deductions for tax purposes and thereby reduce the tax planning opportunities for multinational groups.
Proposed limit on interest deductions
The proposed changes would apply for limited liability companies, as well as Norwegian branches of foreign companies and partnerships.
The proposed changes concerning intra-group interest expenses would limit the interest deduction to an amount equal to 25% of taxable ordinary income adjusted for the value of tax depreciation and net interest expenses for tax purposes. This value approximates earnings before interest, taxes, depreciation and amortization (EBITDA). It is proposed that foreign exchange items would not be included as part of net financial items.
Disallowed interest expenses could be carried forward five years.
Certain exceptions would be made available, mainly for “small companies” (e.g., those with interest expenses below NOK 1 million).
Financial institutions specified subject to Norway’s financial institutions law also would be exempt from the rule on the interest deduction limitation. However, it is possible specific interest limitation rules could be introduced for these institutions in the future.
Petroleum tax regime companies
Further, it is proposed that the interest deduction limitation rules, to some extent, would apply for companies subject to Norwegian special petroleum tax regime.
Companies subject to special petroleum tax, under current rules, make an allocation of interest costs between the “offshore 78% regime” and the “ordinary onshore 28% tax regime” based on tax asset values.
- For the part allocated to the offshore 78% regime, the proposed interest limitations would not apply.
- For the part of interest costs allocated to the onshore tax regime, the proposed interest limitation rules would apply without exceptions.
Because of the allocation rules, many companies would have a large portion of their interest costs allocated onshore.
The Ministry of Finance’s proposal appears to indicate that the interest limitations are to be calculated based on the company’s income related to onshore activities (contrary to total income). As many E&P companies will have no or minimal onshore income, the result of the proposed rules could be that significant portions of interest expenses will not be deductible for tax purposes.
The deadline for submitting comments to the proposal / public hearing is 24 June 2013. Read information (Norwegian) on the public hearing.
Proposed effective date
The Ministry of Finance proposes that the legislation, if enacted, would be effective 1 January 2014.
Tax professionals with KPMG in Norway have expressed an opinion that it is likely that the final proposal on the interest deduction limitation rules could be included in the 2014 budget (expected to be announced in October 2013).
The proposed changes to the interest deduction rules could have a significant impact on multinational groups with intra-group financing relating to their Norwegian operations. The consultation paper offers few exemptions to the limitation rules; thus, it might be difficult for these entities to claim full interest deductions in Norway on intra-group financial arrangements. Multinational groups with operations in Norway need to consider and evaluate their current financial arrangements in light of the proposed changes to the intra-group interest regime in Norway.
The arm’s length principle would also continue to apply in addition to the interest deduction limitation rules that are proposed.
Finally, it has been observed that the proposed rules, if enacted, could affect many E&P companies with intra-group debt—particularly, those “pure exploration companies” with no offshore tax base and no onshore income.
47 4063 9032
47 4063 9183
47 4063 9395
Daniel L. Høgtun
47 4063 9437
Per Daniel Nyberg
47 4063 9265