by Michael Vorndran, Nord Advisory AS, Oslo, Norway
The Norwegian 2019 state budget released last week contains a number of proposed tax changes that will be of significance to companies in Norway. In addition to an unanticipated reduction in the tax rate on ordinary income from 23% to 22%, the Norwegian government took preliminary steps to implement changes proposed by the OECD/G20 BEPS (Base Erosion and Profit Shifting) initiative.
At Nord Advisory we believe that Norway’s 2019 State Budget will have a net positive impact on Norwegian business and help to increase competitiveness. We note that the Norwegian government is implementing the BEPS initiative in line with EU ATAD (Anti-Tax Avoidance Directive) and we expect further alignment with BEPS proposals in the coming years.
Stricter interest deductibility limitations
The State Budget contains a proposal to extend Norway’s interest deduction limitation rules. Currently, Norway’s interest deduction limitation rules apply only to intercompany interest and limit deductions of a company’s net intercompany interest expense to 25% of taxable profit (EBITDA), applicable only when net interest expenses exceed a threshold of NOK 5 million (~ USD 615,460).
The proposed changes include third-party interest expense to external lenders in the calculation of net interest expense and increase the threshold amount to NOK 25 million (~ USD 3 million), but with the threshold calculated at the level of the Norwegian group.
The deduction limitation remains at 25% of EBITDA. Norwegian companies and groups that fall under the threshold of NOK 25 million will still be subject to the current intercompany interest deduction limitation rules. The proposal also allows for reduced net interest deductions to be carried forward for up to 10 years as long as annual deductions are within the rules.
The proposal includes an equity ratio exemption so that the new rule does not negatively impact normal lending conditions. The exemption will give a full deduction for external interest expenses in cases in which the equity ratio in Norway is no higher (approximately) than the equity ratio of the consolidated group. This helps to ensure that there is no erosion of the Norwegian tax base in particular when compared to the consolidated group.
New tax resident concept
The rules for determining whether a company is tax resident in Norway will change effective 2019. Historically, the primary consideration was the location of board level company management. The new rules will extend tax residency to all companies founded under Norwegian law unless otherwise governed by a tax treaty. This will be of particular relevance to shipping companies managed from Norway and Norwegian owned holding companies located abroad.
Tax rate changes
Perhaps the most notable proposal is for the reduction of the tax rate on ordinary income from 23% to 22% for both businesses and individuals.
This proposal represents an effort to keep pace with neighboring countries and remain competitive in the Nordic region. Norway currently has the highest tax rate in the Nordic region and its main trading partner Sweden plans to further reduce its own tax rate to 20.6% by 2021. Considering this, further proposals to reduce the tax rate in the coming years can be expected.
An increase of the petroleum special tax rate from 55% to 56% was proposed to maintain the overall 78% tax on activities conducted on the Norwegian Continental Shelf. This accompanies a proposed reduction in the free income rate from 5.3% to 5.2%. The aggregate marginal tax and deduction value of the free income are assumed to remain unchanged. The tax rate on hydroelectric powerplants was proposed to increase by 1.3% to 37% to offset the reduction in tax on ordinary income.
Tax on financial activities will be maintained at 25%.
As a counterbalance to the abovementioned tax cuts, the proposal includes an increase of the tax rate on dividends and capital gains from 30.59% to 31.68%. Further, the valuation discount on property and capital assets has been proposed to be raised from 20% to 25%. The proposal also includes changes to the deduction rules for insurance and pension companies which have historically led to under taxation.
It is worth noting that the Norwegian government is expected to send a proposal introducing withholding tax on interest and royalties. The bill will be set forth in 2019 and will likely take effect in 2020.