The Norwegian Government on October 8 presented the country’s National Budget 2019, which includes a series of measures to tackle base erosion and profit shifting (BEPS).
First, the Government has proposed that the interest limitation rule would also limit deduction for interest paid to independent parties. The new amendment would only apply to companies in a group.
Currently, the Norwegian tax legislation limits highly leveraged companies’ deduction for interest paid to related parties. The deduction is capped if net interest exceeds 25 percent of taxable earnings before interest, taxes, depreciation and amortization (EBITDA), and if net interest exceeds a de minimis threshold of NOK5m. “Multinational groups can also shift profit by placing excessive amounts of external debt in countries with high or normal tax levels, like Norway,” the Government noted.
“This proposal is an important step in implementing the OECD’s BEPS recommendations,” Siv Jensen (The Progress Party), the Norwegian Minister of Finance, said. “Several EU countries are now implementing similar tax rules to comply with EUs Anti-Tax Avoidance Directive.”
Jensen said: “Multinationals can shift profit out of Norway and thereby pay less taxes. Purely domestic companies do not have the same possibilities, which makes the competition unfair. When we restrict profit shifting strategies, we are levelling the playing field and at the same time securing the tax base. Curbing profit shifting is also crucial to preserve the legitimacy of the corporate tax system.”
The de minimis threshold in the new rule would be increased to NOK25m in net interest. Further, a proposed escape clause would allow full deduction of interest paid to independent parties if the equity ratio of the company equals or exceeds the equity ratio in the group’s consolidated financial statements.
The Budget proposes introducing a withholding tax on interest payments, payments for the use of intellectual property rights (royalties), and lease payments relating to certain tangible assets.
According to the Government, levying withholding tax on such payments would prevent multinationals from transferring profits through disproportionately large loans or tax motivated pricing of internal transactions.
“Norway is one of few countries that does not levy such withholding tax in domestic law. Most countries have national law and provisions in tax treaties to alleviate any double taxation that may arise. These may mean that withholding tax does not increase the overall tax burden, but simply allocates the taxing rights between the countries,” the Government explained.
Corporate tax residence
The Government proposes amendments to the corporate tax residency rules to address tax avoidance strategies and to ensure that companies with sufficient connection to Norway are deemed resident in Norway.
The proposal implies that companies incorporated in Norway and foreign companies having an effective management in Norway would be deemed resident in Norway and liable to pay tax on their worldwide income (subject to the tax treaty provision on residence).
Finally, the Government has proposed to introduce a statutory general anti-avoidance rule that would permit the tax authority to set aside tax-motivated transactions that conflict with the purpose of the tax rules.