Withholding tax on interest, royalties and certain lease payments to be introduced in Norway
The Norwegian Ministry of Finance proposes amendments to the Norwegian Tax Act in order to introduce a 15 % withholding tax on interest, royalty and certain lease payments from Norwegian entities to related parties in low tax jurisdictions outside the European Economic Area (the EEA). Pursuant to the proposal, the amendments will be effective on payments from 1 July 2021. In the following we present the key elements of the proposal.
The rationale behind the new rules
The main rationale behind the proposal is to counteract base erosion and profit shifting (BEPS), and according to the Ministry of Finance the existing regimes of transfer pricing rules and interest deduction limitations do not sufficiently prevent BEPS. Thus, the introduction of withholding tax on interest, royalties and certain lease payments are deemed necessary to further limit the possibility of BEPS.
The typical scenario, which the Ministry of Finance wants to hit, is Norwegian companies with a related company set up in a low tax jurisdiction, which e.g. owns a rig that is hired to the Norwegian company on bareboat terms. According to the Ministry of Finance, such related parties may have an incentive to set a high lease rate, which would be deductible in Norway and taxed at a low rate (or maybe not at all) in the rig owner's jurisdiction. Similarly, the new withholding tax provide an effective measure to levy tax on profits generated in Norway from the use of intellectual property licensed from companies resident in low tax jurisdiction, typically in relation to online services rendered digitally from abroad.
What kind of payments will be subject to the withholding tax?
According to the proposal, three categories of payments will be covered by the new withholding tax:
- Interest payments on debt.
- Royalties for the use of or the right to use intellectual property rights.
- Lease payments on leasing of ships, vessels, rigs, aeroplanes and helicopters.
The terms "interest" and "royalties" shall be interpreted in accordance with Norwegian tax law. However, when it comes to royalties the Ministry of Finance has stated that it may publish further detailed regulations on what would be deemed qualifying royalties at a later stage.
As for lease payments, the Ministry of Finance has stated that it will typically cover bareboat and dry lease payments and the asset lease component of time charter leases. Qualifying assets under the Norwegian tonnage tax regime will not be subject to the proposed withholding tax.
The withholding tax of 15 % will be applied on a gross basis, which means that no deduction is granted in relation to the income subject to withholding tax. Consequently, the withholding tax will be applicable even though the recipient company is in a loss situation.
Companies subject to the withholding tax
According to the proposal, only related companies tax resident in a low tax jurisdiction outside the EEA will be liable for the withholding tax. The payer and recipient of the payments will be considered related parties if they are directly or indirectly under the same ownership or control by at least 50 %. As for the low tax jurisdiction criteria, this will be the same as under the Norwegian CFC (controlled foreign company) rules, which determine low tax jurisdictions as jurisdictions with an effective level of taxation which is less than 2/3 of the level of taxation which the company would have been subject to had it been a Norwegian company.
The low tax jurisdiction criteria imply that payments to recipients that are tax liable to Norway will not be subject to the withholding tax.
Exemption for companies within the EEA
In order to be compliant with Norway's obligations under the EEA Agreement, the Ministry of Finance has proposed an exemption for the withholding tax obligation on payments to related companies that are genuinely established and carrying out genuine economic activities within the EEA. This exemption applies even if the country is considered a low tax jurisdiction (ref. above).
The relevance of tax treaties
Norway has entered into tax treaties for the avoidance of double taxation with a large number of countries. In such tax treaties Norway's right to impose withholding tax on the relevant categories of payments may be reduced – either by way of a maximum tax rate which may be lower than 15 %, or that the tax treaty prevents Norway from imposing withholding tax altogether. As the regulations in the tax treaties may vary quite significantly, it is important to analyse each case specifically in order to determine the extent of the withholding tax obligation. In the proposal, the Ministry of Finance has commented that in future treaty negotiations the Norwegian position will be to include a right for Norway to impose withholding tax on these kinds of payments.
The withholding obligation
It is the company that pays the interest, royalty or lease payments that will be required to withhold the correct withholding tax, and report and pay the amount to the tax authorities. This obligation will extend to Norwegian limited liability companies, foreign companies that are liable to Norwegian corporate tax and partnerships with at least one Norwegian participant. Withholding tax will also be imposed on payments from Norwegian branches of foreign companies, provided that the payment is attributable to the Norwegian branch.
In the event a paying company fails to carry out correct withholding, the paying company will be liable for the withholding tax amount.
Down the road – measures to be taken?
The proposed amendments will have significant impact, especially for many of the existing rig ownership and lease structures, which have been common up until now. The Ministry of Finance acknowledges that the proposal is rather strict and may likely be a "stop rule" for rig companies resident in low tax jurisdictions renting out rigs to Norwegian companies, but the measure is deemed necessary in order to counteract BEPS. Multinational enterprises that would likely be subject to the new withholding tax regime should consider using the time until 1 July 2021 to analyse whether mitigating restructuring actions should be taken.