The current Norwegian tonnage tax regime was approved in 2008 by the EFTA Surveillance Authority (ESA) with effect up and until 1 July 2017.
To ensure that the tonnage tax regime is in accordance with the EEA regulations, the Government will propose certain new limitations to the Norwegian tonnage tax regime. The Government has not yet proposed any specific legislation, but has described the proposed changes in a letter to ESA dated 24 May 2017. The changes, as they appear form the letter to ESA, are described below.
Chartering out on bareboat terms
The current tax tonnage regime allows chartering out of vessels on bareboat terms without any limitations. The Government proposes to introduce restrictions on the right to charter out of vessels on bareboat terms for companies under the tonnage tax regime. The right to charter in vessels on bareboat terms for companies taxed in the tonnage tax system will not be affected by the proposal. The restrictions on the right to charter out vessels on bareboat terms are as follows:
- The chartering out on bareboat cannot exceed more than 50% of total tonnage in the company subject to the tonnage tax regime, alternatively of the tonnage taxed companies within the group. The restrictions shall not apply to bareboat charter between companies in the same group. The restriction shall as a starting point be calculated on a yearly basis, with an exemption allowing for calculation every fourth year.
- In addition to the mentioned restriction, the Ministry proposes another restriction implying that chartering out on bareboat terms in any case cannot exceed five years, with an option to extend the bareboat charter for three years.
- Furthermore, the Ministry of Finance proposes that the strategic management of tonnage chartered out on bareboat terms must be performed within the EEA. Strategic management is defined by the Ministry as the top management of the business, i.e. the level of Board of Directors and General Manager. Strategic management conducted outside the EEA is considered a breach of the terms for the tonnage tax system.
The restrictions imply that, in any case, a company subject to the tonnage tax regime cannot charter out vessels on bareboat contracts with a duration of more than five plus three years. If the duration is shorter, the chartering out on bareboat terms cannot exceed 50% of total tonnage. Thus, companies and groups within the tonnage tax regime with for instance only one vessel, will not be able to charter out on bareboat terms at all.
Exemption for existing contracts etc
The Ministry proposes that the above mentioned restrictions shall not apply for existing contracts. This exemption will, however, not apply to existing contracts with a contract period of more than five years. This entails that existing contracts with a contract period of more than five years, no longer will be considered a qualifying asset for companies taxed in the tonnage tax system as of 1 July 2017.
The Ministry of finance informs that the above mentioned restrictions shall not apply to contract structures which formally imply bareboat charter, but where a local subsidiary of the company owning the vessel takes care of crewing etc, the reality of the chartering being a time charter. Such structures are fairly common in several countries due to local legislation, such as Brazil.
Partnerships and other transparent entities (KS and DIS etc)
In the letter to ESA, the Ministry of Finance does not mention how the restrictions shall be applied to a company taxed subject to the tonnage tax regime owning shares in a vessel owning partnership (KS, DIS etc) that is chartering out the vessel on bareboat terms.
It is likely that shares in partnerships chartering out vessels on bareboat terms over a period exceeding five plus three years, will be considered to be a disqualifying asset for investors subject to the tonnage tax regime. Thus, a company subject to the tonnage tax regime can no longer own such shares and they should be transferred to a company not taxed in the tonnage tax system.
It is uncertain whether shares in a partnership owning a vessel chartered out on bareboat terms over less than five years will be considered a disqualifying asset if the amount of tonnage chartered out on bareboat terms exceeds more than 50% of the partnership's total tonnage. The likely alternative is that the company subject to the tonnage tax regime must include its proportionate share of the partnership's tonnage in the company's own calculation of the 50% threshold. In our view, the latter is in accordance with the Ministry's statements in the letter to ESA, and this will most likely be the result.
Restrictions on chartering in on time charter and voyage charter
Chartering in tonnage on time charter and voyage charter of vessels not registered in an EEA country is suggested limited to 90% of the total tonnage in the group. The restriction is justified by the need to preserve maritime know-how within the EEA. The restriction shall be calculated on group level and on an annual basis.
The Ministry suggests a transitional arrangement implying that the restriction shall not be applied on existing time and voyage charter contracts.
In the letter to ESA, the Ministry of Finance notified ESA of an expansion of the tax tonnage system to include certain new types of windmill vessels. The Government decided on 20 December 2016, that vessels raising, maintaining, repairing and dismounting windmill vessels shall be covered by the system as qualifying assets as of 1 January 2017. However, the expansion has not entered into force pending approval by ESA. If ESA accepts the notification, the expansion will enter into force by the decision from the Ministry of Finance, i.e., from 1 January 2017.
The process going forward
It is expected that the Ministry of Finance will propose the necessary changes in the law in connection with the presentation of the state budget in the autumn. The changes will entry into force on 1 July 2017, even if the changes in the law are approved later. This is because the existing ESA approval of the system expires on 1 July 2017 and thus, the system will be illegal without a new approval.