Norwegian upstream Parent Company Guarantee challenged in court for the first time
In 2005, Norway introduced a (unique) scheme allowing for cash refund of up to 78 % of the tax value of petroleum exploration costs if the licensee generates no revenues from upstream petroleum activities from which the costs may be deducted.
In 2008, Skeie Technology AS issued the Norwegian Government’s standardised, non-negotiable PCG as a condition for the award of participating interests in several production licenses on the NCS to its subsidiary.
In 2009, the subsidiary bought seismic data for about MNOK 412 (about MUSD 47) and thereafter claimed, and received, a corresponding cash tax refund. A subsequent review of the tax assessment, which was upheld by the last instance tax appeal board for petroleum tax, concluded that the motivation for the purchases of the seismic data was primarily to obtain liquidity and not for actual exploration purposes. The Government consequently claimed for restitution.
The subsidiary did not have the financial resources to pay the claim and the Government therefore sought recourse through the PCG.
Skeie Technology AS, as the guarantor and defendant, rejected the Government’s claim, arguing that the claim for restitution was not covered by the PCG based on various lines of defences. The District Court to a large degree agreed with Skeie Technology AS and ruled in their favour.
In a judgement 13 May 2019, the Court of Appeal overturned a District Court judgement, which had been in favour of the defendant.
The Court of Appeal emphasized that the wording of the PCG intentionally is wide and that the purpose of the guarantee is to make the parent company liable for the petroleum related activities performed by its subsidiary to the same extent as if the parent company was carrying out the activities.
The defendant argued that any claim had to be linked to a relevant petroleum license held by the subsidiary, partially because the PCG was issued as a condition for the award (or transfer) of a petroleum licence participating interest. The court concluded, however, that the PCG covers all of the subsidiary’s petroleum-related activities and not only activities that are subject to a licence.
The court furthermore discussed to which extent the claim could be considered to be «in connection with» petroleum activities («operations» in the unofficial translation of the PCG), and concluded that the connectivity requirement had to be interpreted in a wide manner as well. The misuse by the subsidiary of the refund scheme did not disconnect it from falling within the scope.
For some time, there has been a general assumption that the PCG also covers tax claims towards a subsidiary. The Court of Appeal chose not to resolve the question in general and instead concluded that the Government’s restitution claim did not constitute a tax claim.
The form of PCG has been unchanged since the mid-70s and have not been subject to any court review before this case. Although the Court of Appeal has, in our view, correctly overturned the District Court judgement and provided some clarifications, the tax issue remains. An alternative to further clarification by the courts is for the Norwegian Government to revise the standardised PCG and clarify its scope and content. However, given the conservative approach by the Norwegian Government on these type of issues, a change is not likely.
The defendant has expressed that they intend to appeal the judgement to the Supreme Court.
For a general description of the Parent Company Guarantee, we refer to our previous article.
Link to the Court of Appeal judgement (in Norwegian).
1 The chosen approach is also subject to an ongoing penal case, where the oil company and seismic company as well as one from management of each company, have been fined or sentenced to prison terms, three of these penal cases have been appealed.