Introduction and background
The withholding tax will be applicable for:
i) interest payments on debt to related companies in low-tax countries; and
ii) remuneration to related companies in low-tax countries for the use of or the right to use intellectual property rights (royalties) and certain physical assets such as ships, vessels, rigs, aircraft and helicopters.
Seeing as the main purpose behind the rules is to counteract related party transactions resulting in Norwegian tax base erosion and profit shifting, only payments to related companies in low-tax countries are affected by the proposal.
Related companies are proposed to comprise companies which directly or indirectly owns or controls another company by at least 50%.
The limitation to low-tax countries is defined in the same way as in the Norwegian controlled foreign corporation (CFCrules and tax legislation in general, which essentially entails a limit where the ordinary income tax on the profit of the company amounts to less than 2/3 of the tax the company would have been subject to if it had been tax resident in Norway.
To ensure that the rules on withholding tax are in accordance with EEA law, payments to enterprises that are established and conduct real economic activity within the EEA are exempted from the proposed withholding tax. The right to impose withholding tax may further be limited or cut off by provisions on taxation of interest and royalties, etc. which are included in tax treaties with other jurisdictions.
It is proposed that the payer of interest and royalties etc. will be the one who reports, assesses tax liability and makes tax deductions. According to the proposal, the taxpayer (the recipient of the payment) will not be required to submit a tax return to the Norwegian authorities.
Tonnage taxed companies exempt
Payments related to legal assets that are taxed under the Norwegian tonnage tax scheme are proposed exempt from the new withholding tax regime. This is in line with the purpose of the rules given that such companies are not subject to Norwegian corporate income tax and as such no withholding tax is required in order to prevent tax base erosion.
Application on financial lease transactions
The definition of interest is proposed to follow the regular definition of interest in Norwegian tax law. For financial lease transactions, this entails that such payments would only be subject to withholding tax if the interest element of the lease payment qualifies as interest for tax purposes. This is not a clear-cut limitation and the Ministry of Finance has commented that whether remuneration for leasing is to be regarded as interest payments must be assessed based on the circumstances in the individual case.
Effect on bareboat and time charters
The withholding tax will be applicable on bareboat or dry-lease payments to related parties that are residents in low-tax jurisdictions.
In the consultation round clarification of the types of leases that are to be considered covered by the proposal for the new withholding tax was requested and in the current proposal the Ministry commented that bareboat agreements will be the most practical example, as assets of the type covered by the proposal are often leased on such terms. However, in order to avoid adjustments and planning to circumvent the new rules the withholding tax will not be limited to such lease agreements.
The Ministry emphasized that in cases where the lease agreement covers more than the asset itself, for example in time charter agreements, it must be analyzed how much of the payment should be considered to constitute rent for the asset itself, which must be subject to withholding tax.
Application for intellectual property rights
Under the proposal the application on royalty payments entails that the tax will apply on payments for use or lease of intangible assets such as copyrights, patent rights, design rights, trademarks, licenses, know-how and trade secrets. However, the exact content of what constitutes “intellectual property rights” under Norwegian tax law is not clear and the Ministry states in the proposal that there may be a need to provide some more guidance about which payments will be covered by the royalty concept.
There will also be other important limitations where the exact practical limitations are not clear, such as the line between remuneration for the use of, or the right to use, an intellectual property right and payment for an ownership service, as well as cases where the intellectual property is part of a product and the user is granted certain rights related to the use of such product.
Application as a gross tax without deductions
The proposed withholding tax is a gross tax without any deductions. This entails that the tax is due even if the business runs at a loss. This means that the tax will particularly impact payments for physical assets such as ships, rigs and aircraft where it is not uncommon for the activities to periodically run at a loss. With regards to this aspect the Ministry emphasized that it is aware that a withholding tax of 15% is a impactful measure, but the Ministry assumes that it is probable that the withholding tax will act as a stop rule, and that the enterprises as a result of the withholding tax will have to restructure their activities.
Application for partnerships taxed on partner level
With regards to payments from Norwegian companies with participant determination and similar foreign companies with participants who are taxable in Norway the proportionate share of the payment that is to be subject to withholding tax shall be determined according to the corresponding ratios as for the distribution of net profit.