A proposal for changes in the Norwegian Tonnage Tax System was submitted on Friday 24 September. In this article, our tax lawyers consider how these changes will affect shipping companies and the shipping industry if they come into force? Please contact us if you have any questions.
Companies that fulfil certain conditions may opt to be taxed pursuant to the Tonnage Tax System under Sections 8-10 to 8-20 of the Norwegian Tax Act. The system provides for a tax exemption for shipping income, while financial income is subject to ordinary taxation with a tax rate of 22 percent. Companies which are part of the system must further pay a limited tonnage tax. There are currently strict limitations as to the type of assets and activities that are allowed within the system.
The Government has suggested changes in the Tonnage Tax System from 2022, which provide more flexibility. These also reduce the risk of disqualification from the system, causing an involuntary exit. The Government proposes to allow certain types of activities which are currently not allowed; so-called “shared activities”. In addition, the Government’s proposal includes minor adjustments related to guarantee provisions, deductions of deficits from limited partnerships and internal partnerships, as well as income settlements related to shares in partnerships. The Government aims for the changes to become effective as from the income year 2022.
We include further details on the proposals below.
Introduction of access to shared activities
Currently, to qualify for the Norwegian Tonnage Tax System, a company may not conduct business other than the chartering and operation of its own and chartered vessels or of auxiliary vessels. Under the new proposal, companies within the system may also perform other activities (shared activities). The activities that do not qualify for the shipping tax system will be taxed as ordinary income, with a tax rate of 22 percent.
Firstly, it is proposed that qualified companies may from time to time use vessels for purposes other than transportation and offshore service activities. For example, a ship used for bulk transport of petroleum products may also be used for the storage of such products.
Secondly, the system may include vessels that occasionally qualify for the Tonnage Tax System during assignments. An example is fish carriers that at times are used for transporting fish, and at other times, while under the same assignment, are used for stationary activities, such as the delousing of fish.
Thirdly, it is proposed that activities that do not qualify for the Tonnage Tax System may be conducted on board vessels when the activities are closely related to the use of the vessel. An example is the processing of fish on board a fish carrier during transportation.
Fourthly, it is proposed to permit activities with vessels in domestic transportation over a limited area of operation. Income is taxed if the distance sailed does not exceed 30 nautical miles for a third of the year or more.
Previously, the companies' activities within the Tonnage Tax System were limited. With the new proposal, the Government seeks to incentivise shipping companies to take on more socio-economically profitable assignments. It is further intended that access to shared activities will reduce the risk of breaching the terms of the Tonnage Tax System, and thus of an involuntary exit from the system.
"The changes are not intended to extend the tax-free system to include new segments in shipping."
To facilitate shared activities, it is also proposed to change the categorisation of assets which are permitted under the system. According to the Ministry, the decisive factor should be that assets are suitable for use in whole or in part for tax-exempt shipping activities.
The proposal for shared activities will have an impact on the rules on gains from the realisation of vessels and the effects of group contributions.
According to the current rules, gains on the realisation of vessels are tax exempt. The opening for shared activities (activities outside the current system) will also have an impact on the tax liability when realising a vessel. The degree of tax liability for gains, or the right to deduct in the event of loss, shall be calculated and determined based on the usage of the vessel (taxable vs tax exempt shipping activities).
Group contributions to and from a company within the system currently take place with no tax effect. This also applies to taxable financial income. The proposed changes will allow for group contributions to have a tax effect for income from the taxable shipping activities. The group contribution must then always be attributed to the taxable part of the shipping income, both in terms of the provider and recipient of the group contribution.
The proposal will not provide access to group contributions with effect for taxable financial income/deficit.
Other proposed changes
Some other adjustments are also proposed in the Tonnage Tax System. These are believed to have relatively modest consequences. The changes will clarify, adapt and correct weaknesses in the current system.
The Government points out that guarantee commissions within the Tonnage Tax System should be taxed in the same way as interest income, as is otherwise the case under Norwegian tax legislation. Tax practice currently provides full deductions for guarantee commissions for entities [operating under] the Tonnage Tax System, while only part of the interest costs are deductible. According to the Government, the limitation on deductions should therefore also apply to guarantee costs.
Another proposal is that limited partnerships and silent participants within the Tonnage Tax System should not be able to offset losses against other financial income. The Government points out that the limited coordination possibilities, that applies in general, should also apply to limited partnerships and silent participants.
Furthermore, changes are proposed in the income settlements related to participations in partnerships. Income settlements are to be made if companies that are not separate tax subjects enter the Tonnage Tax System. Income settlements are also made if a company within the system acquires a share in a participating company from a related, ordinarily taxed company. The settlement aims to prevent deferred gains tax that has accumulated prior to entry into the Tonnage Tax System from becoming tax exempt. The proposal would mean that the chosen price level does not have an impact on the calculation of taxable gains.
In addition, it is proposed to extend tax liability when partnership shares are acquired. It shall no longer be a condition for taxation that the share is acquired from a related company.
The consultation deadline is 7 January 2022.