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Newsletter - Proposed introduction of withholding taxes

In its proposed national budget for 2021 which was submitted to parliament on 7 October, the Norwegian government proposes the introduction of withholding taxes on interest, royalties and certain lease payments. But for certain minor amendments, the proposal is in line with a previous draft version which was made public in February 2020. We expect the withholding tax legislation to be adopted by parliament and it will then enter into effect as of 1 July 2021.

INTEREST WITHHOLDING TAX

The scope of the interest withholding tax is limited to interest payments paid to 

A related party is a party that is either 50 % common control with the payor or has at least 50 % direct or indirect control of the payor.

A low tax jurisdiction is broadly defined a jurisdiction where the effective tax is less than two thirds of what it would have been had the payee been tax resident in Norway. This entails that if the effective taxation of the interest payment is at 15 % or higher then no withholding tax would apply.

It follows from the above that interest on ordinary bank debt and bonds are proposed to be fully exempted from the withholding tax.

ROYALTY WITHHOLDING TAX

Royalties is intended to comprise consideration for the use of right to use intellectual property rights, patent rights, design copyrights, trademarks, licensing rights, know-how and trade secrets. There is no requirement that the intangible in question has any form of legal protection.

The withholding tax is not intended to capture payments for services. Thus, a key question is whether the Norwegian party has a right to use the intangible property in its own course of business or whether the intangible right is used as part of the non-resident’s delivery of services to a Norwegian party. Further, a full purchase of the intangible right falls outside the scope of the proposed withholding tax.

The withholding tax is only proposed to apply to payments made to related parties (please see above) and only if the payee is resident in a low tax jurisdiction.

WITHHOLDING TAX ON CERTAIN LEASE PAYMENTS

Lease payments for certain large capital assets such as rigs, ships, airplanes, and helicopters will also be subjected to a withholding tax. In previous versions of the proposal the government left it open as to whether such payments should be subjected to withholding taxes.

The scope is limited to related parties (please see above) and will only apply if the lessor is resident in a low tax jurisdiction or not. The tax will also apply when the payment is made from a Norwegian permanent establishment of a non-resident company to another non-resident entity. If adopted, this tax will affect bareboat/dry lease structures in Norway where the non-resident company is not protected from taxation by a tax treaty, see next point on tax treaties.

Companies which are taxed within the special shipping tax regime will be exempt from the proposed source taxation. This will equally apply where payments are considered as interests.

EFFECT OF TAX TREATIES

Norway has an extensive tax treaty network comprising around 90 double tax treaties. In many of these treaties Norway has relinquished the right to impose withholding taxes. The effect of the withholding tax would thus be significantly limited for non-resident entities that can invoke tax treaty protection. Further, it should be noted that the royalty definition in the vast majority of Norway’s tax treaties does not include leasing of equipment. Please note that there are qualifying thresholds for being protected and each tax treaty must be assessed individually.  

WAY FORWARD

The proposal has now been presented to parliament as part of the 2021 budget package. We do expect that there is a broad consensus in the parliament for adopting some form of withholding tax but it cannot be ruled out that certain parts of the proposal may be changed during the parliamentary deliberations. Ordinarily, the parliament would vote on the budget matters during the course of November.

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