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New Norwegian tonnage tax scheme as of 1 November 2018

In December 2017, ESA approved the extension of the Norwegian tonnage tax system ("NTT") for 10 more years. ESA's approval was however subject to certain restrictions being made to the current NTT. The restrictions created some confusion and unanswered questions, which now seem to have been clarified.
Beautiful image showing the bow of a large ship

On 22 June 2018 the Norwegian government published a proposal for amendments to the Norwegian Tax Act in accordance with ESA’s decision of 14 December 2017. The proposal will come into force immediately with effect from the financial year 2018.

The previous NTT did not contain any restrictions in terms of bareboat chartering.  The new NTT has certain limitations as to how big part of the fleet that can be bareboat chartered out. The purpose is to ensure that the NTT is not available to companies that in reality are mainly involved only in the financing of vessels.

In a formal bareboat charter where the owner is not responsible for manning the vessel, but where a closely owner-related company is responsible for the manning, such charter may be regarded as NTT-qualifying. The new legislation provides details on which companies are to be regarded as “related companies”, and those interested should seek guidance in those provisions.

General requirement: only Operational Leases are NTT-eligible

Companies within the NTT can only enter into Operational Leases and not Financial Leases.

A bareboat charter is considered a Financial Lease if one or more of the requirements below are met:

  • it is agreed that the charterer, or a third party, shall have the option to take over the vessel at the end of charter period, except where the charterer/third party shall take over the vessel by paying the market value determined at the end of the charter period.
  • any other circumstances makes it likely that the charterer or a third party will take over the vessel during the charter period or later, expect where the purchase price shall be the market value at the time of take over.
  • the  value of the charter hire is more than 90% of the market value at the time of entering into the contract.
  • the whole or parts of any profit and loss on the vessel due to market fluctuations are charterer’s risk.
  • the charterer is entitled to extend the charter period to a charter hire below the applicable market rates.
  • the charter period has a duration of more than 50% of the vessel’s economic life, calculated at the entering into of the charter contract.

Additional requirements

Non-offshore service vessels:

In addition to the requirement that a bareboat charter must be considered an Operational Lease, no more than 40% of a group’s tonnage can be on bareboat out (the “General Rule”). The percentage of the tonnage on bareboat out shall be measured on a yearly basis and calculated as an average for each day. A group can however choose to be measured on a four year basis.

Offshore service vessels:

For offshore vessels as defined in the Norwegian Taxation Act § 8-11, there is an alternative rule that maximum 50% of the fleet may be on bareboat (the “Offshore Service Rule”).  The charter period may not exceed 5 years (+ 3 years option) and the strategic management of the vessel must take place in an EEA state.

Transitional rules for charters entered into prior 1 January 2018

The new NTT scheme will apply to contracts entered into on or after 1 January 2018.

However, for the purpose of calculating the percentage of the tonnage chartered out on bareboat terms, long term contracts entered into prior to 1 January 2018 shall be taken into account. For Operational Leases a contract is considered long term where the remaining period per 1 January 2018 is more than 8 years. Under the alternative Offshore Service Rule a contract is long term where the remaining charter period per 1 January 2018 is more than 5 years however so that any option to extend for 3 years shall not be taken into consideration.

Any amendments to the charter period for existing bareboat charters entered into between 15 November 2017 and 31 December 2017 will not be taken into consideration.

If a company/group does not meet the new NTT requirements for bareboat chartering out, the company/group will be excluded from the NTT from 1 November 2018. The old NTT will still apply for the first 10 months of 2018.

The new NTT shall apply for 10 years from 1 January 2018.