Rune Tjomsås Andersen
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In a paper published yesterday the Norwegian government proposes the introduction of a limited interest withholding tax as well as a broader withholding tax on royalty payments. In addition, the government argues that certain related party lease payments should be subject to a withholding tax, but it has yet to finally decide on whether it should be included in the final legislative proposal. The withholding tax rate is proposed to be at 15%. The proposals include also companies subject to the special petroleum tax regime. It is proposed that the rules should enter into effect as of 1 January, 2021.
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.
To accommodate recent case law from the EU Court, the rules includes an option for EU/EEA companies caught by the rules to be taxed on its net income rather than the gross basis withholding tax. This would require the interest recipient to submit a Norwegian income tax return. This option for EU/EEA companies applies equally to the rules of withholding tax on royalty and lease payments.
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), but it will apply regardless of whether the payee is resident in a low tax jurisdiction or not.
The government argues that lease payments for certain large capital assets such as rigs, ships, airplanes, and helicopters should be subjected to a withholding tax. However, the government states that it will finally decide on whether to submit the proposal to parliament only after having reviewed the comments received during the consultation period.
Nevertheless, the consultation paper contains proposed statutory language on a withholding tax for lease payments. The scope is limited to related parties (please see above) but it will apply without regard to whether 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 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 are proposed to be exempt from the proposed source taxation. This will equally apply where payments are considered as interests.
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.
The proposal is now on a public consultation period which closes on 27 May, 2020. All interest parties may submit their written comments to the proposal until that date.
We expect that the interest and royalty withholding tax will be presented to parliament in connection with the presentation of the 2021 national budget in October. The results of the public consultation is most likely to entail minor clarifications to the proposal as there is a clear commitment in all major political parties to introducing these taxes.
With respect to the withholding tax on lease payments, it is more difficult to predict the outcome of the consultation. Based on past statements made from various political parties it seems likely that also this tax will be adopted. However, given the pronounced doubt expressed by the government in the consultation paper they may be receptive to arguments to the contrary.