On the 7 October 2020 the Norwegian Government presented the national budget for 2021. One of the most important proposals from the Government is to introduce withholding tax on interest and royalties. Such an introduction has been expected since the Tax Committee made their proposal in 2014. However, the proposed rules are given a more limited scope than their original proposal.
The proposal entails a withholding tax of 15% on interest, royalties and rent payments for certain assets. Withholding tax is limited to payments to "related companies" in "low-tax jurisdictions" outside the EEA-area.
The main purpose of the proposal is to counteract transfer of profits from Norway and contribute to a fair competition between international and Norwegian groups. Profit shifting is often carried out with artificially high interest rates, royalty payments or rent payments to related companies in low-tax jurisdictions.
An example cited by the ministry is rent payments for rigs. The activities of the rig group companies are often twofold: On the one hand, ownership of the rig is exercised in low-tax jurisdictions and thus they are not taxed in Norway when the rigs are rented out on the Norwegian shelf. On the other hand, the group delivers services related to rig rental through drilling companies that are taxable in Norway. Low or no taxation in the low-tax jurisdiction provides an incentive to set the rent payment artificially high, so that it provides a basis for large tax deductions in Norway. This way, the group can reduce the tax base for the business that is taxable in Norway.
The tax liability according to the new regulation shall include:
1. interest on debt to related companies in low-tax countries, and
2. remuneration to related companies in low-tax countries for the use of or the right to use intellectual property rights (royalties) and certain assets.
To understand the scope of the rules, it is important to understand the following terms;
- Interest - remuneration to the lender for credit benefits.
- Intellectual property rights - copyrights, patent rights, trademarks, licenses, know-how and trade secrets, etc. In assessing whether one is facing remuneration for the use of an intellectual property right, it is important to determine whether the right is made available to the user, which in that case will mean that it is covered by the proposal here, or whether the intellectual property right is part of a service that the owner performs himself.
- Certain assets - ships, vessels, rigs, etc., aircraft and helicopters. Payments related to assets that are taxed under the shipping tax scheme are proposed to be exempt from withholding tax.
- Related companies - companies etc. (impersonal taxpayers) who directly or indirectly own or control another company by at least 50%.
- Low-tax countries - countries with a tax level that is lower than two thirds of the tax level that applies to similar companies in Norway (as of today countries with a lower tax level than 14%).
The obligation to assess and deduct withholding tax is imposed on the "payer" of interest or royalties. For this reason, the non-Norwegian recipient will not be required to submit a tax return to Norway.
The rules will not apply to EEA countries or the countries with which Norway has entered into a tax agreement, where withholding tax is not permitted. Thus, the effect of the rules is significantly limited.
The rules are proposed to be introduced from 1 July 2021 so that some time is given to adjust. The rules are estimated to provide increased revenue in 2021 of NOK 245 million.