Proposal from the Norwegian Government to implement withholding tax on interest payments and royalty

The Norwegian Government under the Ministry of Finance has proposed to implement withholding tax on interest payments and royalty.

The withholding tax rate is suggested to be 15 percent and the rules will be effective from 2021. The proposal does not conclude on whether the rules should include withholding tax on rental of production factors; capital intensity assets as vessels, rigs and airplanes.

To date Norway has only levied withholding tax on outbound dividend payments. The Ministry of Finance has on the 27 February 2020 published a Consultation Paper proposing to also include withholding tax on interest payments and royalty. The proposal is to impose withholding tax on:

  • interest payments from closely related entities reisdent in low-tax jurisdictions,
  • royalty payments to closely related entities abroad

The Consultation Paper leaves the question to which extent the rules should include payments related to the use of physical assets unanswered. The Ministry requests comments on this issue in the hearing process which will close at the 27 May 2020.

Purpose of the rules

The original purpose of  withholding tax is to safeguard the Norwegian sourced income. As withholding taxes are gross income based tax and it does not include possibilities for tax deductions for any costs related to such income. It is therefore directly affect the cash-flow of the recipient of such payments. As a result, multinational companies will do their outmost to avoid withholding tax on interest payments and royalties. The purpose of the rules is to prevent profit shifting due to multinational entities exploiting gaps and mismatches between the tax systems of different countries.

The Ministry states that by implementing a domestic rule levying withholding tax on interests and royalties will contribute to the effort against aggressive international tax planning, which is a threat to the global economy and international cooperation.

The proposal at a closer look
The Ministry has suggested that if the recipient of the interest payments and royalties resides within the EEA, it is given the option to be taxed based on its net income instead of the gross amount, but only  under the condition that the company is actually established and performs real economic activity within the EEA-area.

The Ministry has also suggested that the tax lability should include payments to closely related entities abroad for rental of physical assets, for example capital intensive assets such as vessels, airplanes, rigs etc. The Consultation Paper does not further address this issue and the Ministry has announced that they will publish more information at a later stage.

The Ministry proposes, however, to exempt assets qualifying for the Norwegian Tonnage Tax regime from withholding tax. Foreign owners of such assets will therefore not be subject to taxation under the proposed new legislation. Hence, similar assets to assets which actually do fall under the scope of the Norwegian Tonnage Tax regime will most likely be levied withholding tax as proposed for other capital intensity assets.

The deadline for submitting comments to the Consultation Paper is set to 27 May 2020 and it is expected that the new rules will be announced in connection with the announcement of the National State Budget for 2021 which usually takes place in the beginning of October in the preceding year.

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Profit shifting
Profit shifting refers to corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions, thus "eroding" the "tax-base" of the higher-tax jurisdictions. Here it refers to arrangements that reduce the tax burden in Norway, but has little impact on the real economy. This means, for example, that significant input factors underlying the value creation are still in Norway, while ownership of the income-generating asset is abroad.

Closely related company/entities
When there is direct or indirect ownership or control of at least 50% of the company, it is considered closely related. The criteria “controlling” aims to capture situations where the controlling influence over another legal entity is based on other than ownership.

With closely related companies, we mean either:

a. companies and entities where the payer of interest directly or indirectly owns or controls by at least 50 percent;
b. a company or entity which, directly or indirectly, owns or controls the payer of interest at least 50 percent;
c. company or entity as a related party under b., directly or indirectly, owns or controls at least 50 percent.

Traditionally, the definition of royalty has been payment for access to or use of intellectual property rights. This includes copyrights, patent rights, and design rights. Other examples of intellectual property rights that will be covered by the provision are trademarks, licenses, know-how and trade secrets.

Low-tax jurisdiction / tax haven
A low-tax country is regarded as a country where the ordinary income tax on the total profits of the company or facility constitutes less than two-thirds of the tax the company or facility would have incurred if it had been resident in Norway. The Norwegian general tax rate for the fiscal year of 2020 is 22 percent.