On 7 October 2020, the Norwegian Government presented the state budget for 2021. As expected, a proposal to introduce withholding tax on interest and royalties was presented.
Historically, Norway has only imposed withholding tax on dividends. However, the Ministry of Finance proposed that withholding tax should also be imposed on interest and royalty payments made to related parties in "low-tax jurisdictions" at a rate of 15 %. The withholding tax measures were proposed to enter into force as of 1 July 2021.
The majority in the finance committee agreed with the proposal. In the budget settlement, however, it was agreed to postpone the entry into force of withholding tax on the lease of certain physical assets until 1 October 2021. For interest and remuneration for the use of or the right to use intellectual property withholding taxes will be applicable on payments following1 July 2021.
The tax liability shall include:
- interest payments on debt to related companies in low-tax jurisdictions, and
- remuneration to related companies in low-tax jurisdictions for the use of, or the right to use, intellectual property rights (royalties)
- lease payments for certain physical assets
Such payments are considered to involve a particularly high risk of profit shifting.
The background for the proposal was that the Norwegian Government is concerned with protecting the Norwegian tax base against profit shifting and must be seen in connection with the BEPS initiatives. In addition to contribute to the international measures against profit shifting, it is the Government's opinion that Norway needs to have effective measures in its domestic legislation. The main purpose of the proposal was to counteract profit shifting from Norway that takes place through artificially high interest- and royalty payments, etc. to related companies in low-tax jurisdictions. In addition, the rules will also prevent Norway from being used as a flow-through country for such payments.
The definition of interest and intellectual property rights (royalty) shall mainly coincide with applicable Norwegian tax law. However, interest payments on financial leasing of physical assets that are taxed under the tonnage tax scheme, which are classified as interest for tax purposes, should be exempt from withholding tax.
Related companies
The limitation to payments to related companies is justified by the fact that the risk of profit shifting is particularly high in such cases. In addition, such a limitation will be easing the burden related to the withholding tax obligations of the enterprises that are to assess the tax liability of the recipient.
The limitation of application only to related parties means that ordinary bank loans and bonds as a main rule will be shielded from withholding tax.
Related parties are defined as companies etc. which directly or indirectly owns or controls another company with at least 50 per cent.
Low-tax jurisdiction
The limitation to payments only to low-tax jurisdictions is justified by the objective to target the situations where the risk of profit shifting is greatest.
However, in order to ensure that the rules on withholding tax are in accordance with EEA law, payments to enterprises that are genuinely established and conduct real economic activity in a low-tax jurisdiction within the EEA, would also be exempt from withholding taxes.
The term "low-tax jurisdiction" should be understood in the same way as in other parts of Norwegian tax legislation. Under this legislation a jurisdiction is considered to be a “low-tax jurisdiction” when the effective taxation of the entity in question is lower than two-thirds of the effective taxation that the entity would have subject to if it were a resident of Norway. The starting point is that a general comparison should be made of the difference in the level of ordinary income tax in Norway and in the other state for the type of entity in question. If special rules such as tax breaks or holidays are provided for specific types of companies, businesses or revenues in the other state, the relevant comparison is the income tax imposed on similar companies and facilities or revenues in Norway.
Physical assets
The Ministry has identified a high risk of profit shifting through certain rental payments as well as for royalties.
The lease payments that will be subject to the withholding tax are leasing of ships, vessels, rigs, etc., aircraft and helicopters, corresponding to the balance group included in the Norwegian Tax Act § 14-41 letters e and f. Regarding payments related to assets used in operations that are subject to the Norwegian tonnage tax regime, these are exempt from the scope of the withholding tax. Lease payments for similar assets that are used in regularly taxed business operations will however be subject to withholding tax.
Tax treaty
Even if withholding tax is introduced on interest, royalties and certain rental income, the right to impose withholding tax may be limited or lapse by provisions in tax treaties with other countries. The tax treaties that Norway has entered into often limits withholding tax on such income. The new rules will therefore be of greatest significance for recipients in low-tax jurisdictions outside EEA with which Norway has not entered into a tax treaty.