Anders V. Heieren
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On the 11th of April 2013 the Norwegian Ministry of Finance published a proposal for hearing and invited public submissions on the introduction of an interest deduction limitation for loans between related companies.
A final proposal was launched on the 14th of October 2013 as part of the 2014 state budget. The final proposal reflects that critical submissions from the industry and advisors have not been heard, apart from some minor adjustments and what is announced as a delayed implementation for oil companies. If enacted, the new rules will become effective from the income year 2014.
A related company is defined as a lender directly or indirectly controlling 50% or more of a borrower, or a borrower directly or indirectly controlling 50% or more of a lender. The proposed regulations limit the deductible amount of interest to 30% of an adjusted taxable income, when paid to a related company (increased from 25% in the hearing proposal).
The adjusted taxable income is taxable income increased by net interest costs and tax depreciations, similar to EBITDA. The taxpayer will not be able to deduct interest payments to the extent the expenses exceed 30% of the mentioned “tax EBITDA”. The taxpayer cannot carry forward loss against the income caused by the disallowed interest expense.
Companies whose net interest costs are below NOK 3 million are exempted from the interest limitation rules (increased from NOK 1 million in the hearing proposal).
The interest deduction cap shall apply on domestic as well as cross border loans. Income accrued from interest payments will be taxable income for the lender regardless of the cap on deduction for the borrower. The cap will not apply to external bank financing, although a few exemptions are made to prevent “back-to-back” loans through external banks. The “back-to-back” loan exemption implies that the interest limitation rules are applicable on a subsidiary’s loan in a bank, where its parent company has paid or guaranteed an equivalent amount to the bank. The rules will also apply if the parent company has guaranteed for the subsidiary’s loan. This is a new and dramatic aspect of the proposed regulations, although the Ministry is aware of that the proposal might be too far reaching on this point and has simultaneously announced further regulations to soften this effect. The debt/equity ratio is irrelevant under the proposal, as is the aggregate interest expense or equity ratio on group level.
Disallowed interest expenses can be carried forward for up to 10 years. The proposed legislation shall comprise both limited and unlimited companies, controlled foreign corporations (CFC), and foreign entities with limited tax liability to Norway. Financial institutions shall be exempt.
Although the new proposal to some extent has been modified from the hearing proposal in April 2013, the new rules may lead to a significant increase in tax costs for a number of companies if they do not take precautionary steps (such as debt conversion, merger, re-financing, etc.).
The Ministry has stated that the rules also will be made effective for oil companies following a more detailed review of the effects and implementation measures.
Many critics had called for a delay to co-ordinate with OECD recommendations under the BEPS project and/or to introduce safety measures, such as not taxing the recipient of interest income paid by a company with disallowed interest expense, not disallowing interest expense if debt/equity ratio is within the overall group ratio, not disallowing deduction if the recipient is taxable for the interest income, and/or to allow taxable income created by the rules to be passed as group contribution.
The proposal was tabled by the Stoltenberg II-Government, and the new Government lead by Solberg will decide during November if and how the proposal shall be adjusted before being finally discussed in the Parliament in December.
Due to the change in Government, the outcome remains somewhat uncertain, but it is highly recommendable to review the effects and start planning for how to accommodate.
Please contact us if you want a more thorough presentation or analysis for your company.