The Norwegian Government proposes changes to the rules on interest limitation and corporate tax residency, and to reduce the corporate tax rate. According to the Norwegian Government the proposals will curb profit shifting and base erosion and level the playing field for national and multinational businesses.
The main proposals for the 2019 Fiscal Budget regarding corporate taxation were:
- The corporate income tax rate will be reduced from 23 % to 22 %
- The interest limitation rule shall also limit deduction for interest paid to independent parties
- Companies incorporated in Norway and foreign companies performing effective management in Norway will be deemed resident in Norway and liable to pay tax on their worldwide income
The proposed amendments will enter into force from 1 January 2019.
The corporate tax rate
The Government proposes to reduce the corporate tax rate from 23 % to 22 %.
The interest limitation rule
The Government proposes amendment to the Norwegian interest deduction limitation rules that limits companies’ deduction for interest paid to related parties. Under the current rule deduction is capped if net interest exceeds 25 per cent of taxable EBITDA and if net interest exceeds a threshold of NOK 5 million.
The Government proposes that the interest limitation rule should also limit deduction for interest paid to third-parties, for example to banks. The Government also proposes that the threshold in the new rule is increased to NOK 25 million in net interest. This means that groups with total net interest in Norwegian companies of less than NOK 25 million are not affected by the changes. A proposed escape clause will allow full deduction of interest, if the equity ratio of the company, or the average ratio of all Norwegian companies within the group, equals or exceeds the equity ratio in the group’s consolidated financial statements.
The Government proposes that certain adjustments to the accounting numbers have to be made when calculating the equity ratio. Purely domestic groups will by definition fulfil the conditions of the escape clause and will thereby always be able to fully deduct interest paid to third-parties. The Government proposes that if the threshold amount is exceeded, necessary information shall also be provided in a separate form with the auditor’s approval.
Corporate tax residency rules
The Government also proposes amendments to the corporate tax residency rules. The proposal implies that companies incorporated in Norway and foreign companies performing effective management in Norway will be deemed resident in Norway and liable to pay tax on their worldwide income.
For Norwegian companies, the Government propose that a company that has been incorporated by Norwegian company law always will be considered as tax resident in Norway. However, if the company is considered tax resident in another country under a tax treaty, the company will not be deemed resident in Norway.
For foreign companies, the Government propose that a company that has been incorporated under foreign company law, the place of effective management will still be decisive. However, the assessment is changed by not only considering the place of management at board level, but also where the management at CEO level is performed, and in some cases the location of the offices and where the company perform its operations.
The Government states that in cases with "shared management", for example where a company's management at the board level is exercised abroad, while daily management is exercised in Norway, the power of attorney to the day-to-day management will be relevant. Other circumstances in the company's organization and business (where the general meeting is held, where investment decisions are taken, where the headquarters are and where operational activities are performed) will also be included in the assessment and may be particularly relevant where there is so-called shared management.
The Government also proposes to introduce a rule of internal law, which means that companies resident in another country under a tax treaty will not be considered resident in Norway under the internal law. This in order to prevent opportunities by taxpayers, as an internally resident may benefit from Norwegian group contribution rules and the exemption method while giving the company benefits according to the tax treaty.
Furthermore, the Government proposes that all companies under the proposed provision, even if they do not have a taxable business in Norway under the tax treaty, shall be obliged to provide tax returns.
Tax on Digital Revenue Platform
The Government refers to proposals for taxation of companies with digital income models - a "Google tax" and refers to the OECD work and working group dealing with fiscal challenges related to the digital economy. The work of the OECD / G20 on tax consequences of increased digitalization is considered to make changes, including the need for physical presence and that the financial presence shall be of greater importance. Norway actively participates in the OECD work where proposals for changes are to be presented in a final report by 2020. In addition to the work on lasting solutions, temporary solutions are also considered, and in this respect a gross fee on the sale of certain digital services will be considered. The Ministry of Finance shall provide a proposal for temporary domestic tax rules by 2019. It was stated that withholding tax on royalty could to some extent mitigate the need for temporary rules.
Proposal to introduce withholding tax on interest and royalty payments
The Government refer to the notified rules on withholding tax on royalties and lease payments. The Government states that they intend to send out a proposal on withholding tax on interest and royalty payments within 2018 and propose a new bill and implement internal rules regarding withholding tax on such payments within 2019.
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