The Ministry proposes to extend the current rules so that they also comprise interest payments to third party creditors for Norwegian companies that are part of multinational corporate groups. In order to prevent the rule from affecting ordinary loan arrangements, certain complex exceptions to the limitations are also proposed. The changes are proposed to become effective from the fiscal year 2018. The deadline for providing remarks to the consultation paper is the 3rd of August 2017.
In 2014, Norway introduced interest limitation rules which limit the right to tax deductions for interest on related party debt. The purpose of the rules was to avoid multinational corporate groups eroding the Norwegian tax base by deducting significant interest expenses in Norway, while the receivables and the related interest income was allocated to jurisdictions with low or no taxation of capital income. Today, the interest limitation rules entail that tax deductions for interest expenses on related party debt are limited to 25 percent of a company's calculated "tax EBITDA", i.e. the debtor's net taxable income plus net interest expenses and tax depreciations. The limitation applies only if the net interest expenses exceed NOK 5 million in the relevant fiscal year. Tax deductions for interest expenses on loans from third party lenders are currently not subject to limitations, unless the loan is secured by a related party. However, interest deductions on loans issued by external parties (banks, financing institutions etc.) may reduce the tax deductions available for interest expenses on related party debt.
It has been argued that multinational corporate groups can avoid the effects of interest limitation rules by placing debt to unrelated lenders in group companies resident in jurisdictions with interest limitation rules, while group companies resident in typical low-tax jurisdictions have correspondingly low debt to unrelated lenders. In order to avoid such tax planning measures, the Ministry has proposed to extend the scope of the interest limitation rules to also comprise group companies and that for such tax payers the rules also apply to interest payments on loans from external parties. In order to prevent the rules from affecting commercially driven structures that are not tax driven, the Ministry has also proposed relatively complex exceptions to the extended limitation rules.
The proposed changes entail that Norway will have one interest limitation rule applicable to group companies and interest payments on all types of debt, and one interest limitation rule applicable to companies not part of a company group and interest payments on related party debt. In the consultation paper, the Ministry states that it will consider, in light of future experience with the rules, whether there is a need for additional amendments to the rules, both in terms of anti-avoidance measures and in terms of potential negative consequences for the business environment.
Interest paid by group companies on debt from unrelated parties – limitation on interest deductions
In the consultation paper, the Ministry proposes that tax deductions for interest payments shall be subject to limitations for taxpayers that are companies part of a corporate group (i.e. are included in consolidated financial statements or which could be included in consolidated financial statements under IFRS), and that this shall apply both to interest payments on loans from related parties and unrelated parties.
For such group companies, it is proposed that interest payments on loans from related and unrelated parties shall not be tax deductible to the extent they exceed 25 percent of the company's calculated "tax EBITDA". The limitation shall only apply if the net interest expenses for the Norwegian part of the corporate group exceeds NOK 10 million in the relevant fiscal year. Interest expenses that are not tax deductible under the limitation rules can be carried forward for 10 years.
Exemption rules for ordinary loans
In order to prevent the interest limitation rules from affecting ordinary loans, the Ministry proposes to implement a so-called "balance-based" exemption rule. In principle, the exemption entails that group companies affected by the new rules can still claim tax deductions for their net interest expenses in the relevant fiscal year if the equity ratio in the company's balance sheet is approximately equal to, or higher than, the equity ratio in the group's consolidated accounts. It is proposed to implement two alternative exemptions:
- The taxpayer will not be subject to the limitations if the equity ratio at company level is not lower than the equity ratio in the corporate group less two percent. If the group's consolidated accounts have not been prepared in accordance with the same accounting principles as the company's accounts, the company's accounts must be converted in accordance with the accounting principles applied for the group's consolidated accounts. Also, adjustments to the company's balance sheet must be made based on the purpose of the exemption rule.
- The taxpayer will not be subject to the limitations if the total equity ratio in the Norwegian part of the group (i.e. the Norwegian group companies combined) is not lower than the equity ratio in the global group, less two percent. Company groups that have several Norwegian "sub-groups" must calculate the equity and balance amounts for each Norwegian "sub-group" before aggregating these to a weighted average that leads to a consolidated balance sheet. The balance sheet must be prepared in accordance with the same accounting principles as the consolidated accounts for the entire group, with some adjustments.
Today, certain financial companies and petroleum companies are exempt from the interest limitation rule. The Ministry does not propose to change these exceptions, but such companies should be included in the consolidated accounts in the same manner as other companies when applying the exemption rules.
The Ministry proposes that the accounts used when applying the exemption rules should be approved by an auditor. This applies to both the Norwegian accounts and the consolidated accounts.
The proposal from the Ministry entails a significant extension of the scope of the current interest limitation rules. There is also a risk that the rules will affect loan arrangements that are put in place purely for commercial reasons and without any tax motivation, despite the proposed exemption rules. The exemption rules are complex and impose increased documentation and filing requirements on Norwegian companies that are part of a multinational group. The deadline for providing comments to the consultation paper is 3 August 2017.