National budget 2016 – Tax reform - Corporate taxation

The proposal for the national budget for 2016 and the Government’s follow up of the Scheel committee’s proposal for a tax reform were submitted today at 10 am. The budget and the tax reform report provide fewer surprises than we had expected. However, they give a certain hint of where the Government is headed.

Below we provide an overview of the most important amendment proposals relating to corporate taxation. The amendments are proposed entered into force as from 01.01.2016, unless otherwise stated below. We also provide an overview of the main proposals in the tax reform report.

The corporate tax rate is reduced from 27 % to 25 %

As expected, the Government proposes to reduce the corporate tax rate from 27 % to 25 %. There will still be a common tax rate on ordinary income for enterprises and individuals.

In the tax reform report, it is proposed that the corporate tax rate is reduced to 22 % during a three-year period (2016-2018), and that further reductions are assessed in light of the international development.

Tightening of the interest deduction limitation rule

The Government proposes a tightening of the rule limiting the deductibility of interests paid to associated companies. At present, deductions for interest payments to associated companies are limited to 30 per cent of earnings before interest, taxes, depreciation and amortisations. The proposal entails a reduction of the deduction limit from 30 % to 25 %.

In accordance with the Scheel committee’s proposal, a further tightening of the rule is discussed in the tax reform report. In line with the Scheel committee’s proposal, the Government states that the rule should be tightened so that it also hits profit shifting through interest payments to third party lenders (external interests). A prerequisite for this is that a satisfying solution is found for preventing that deductions for “actual interests” are limited. This will also be assessed in light of OECDs recommendations on national interest deduction limitation rules. The recommendation is likely to entail a limitation on deductions for external interests, but at the same time that a tax group should be granted deductions for the group’s total (global) interest costs to third party lenders. A possible global rule will need further assessment.

Disapplication of the participation exemption method when the distributing company is granted deductions for the distribution (hybrid instruments)

The Government follows up on the Scheel committee’s proposal to disapply the participation exemption method to the extent the distributing company is granted deductions for the distribution. The background for the amendment is that in certain cases states classify financial instruments or legal entities differently (hybrid situations), resulting in income not being taxed in any country. The purpose of the proposal is to alleviate these effects.

In OECDs BEPS project, there is a specific action point relating to hybrid situations. OECD has presented preliminary recommendations on how national rules should be formulated to prevent unfortunate effects of such arrangements. The main feature of the recommendations is so called “linking rules”. If the recipient state does not tax the income, the distributing state shall deny deductions, and the other way around when the distributing state allows deductions. In the tax reform report, the Ministry of Finance also emphasizes that it may be relevant to consider other anti-hybrid rules and that it will further assess the need, i.a. in light of the final recommendations from OECDs BEPS project.

Securities funds

Amendments of the rules on taxation of securities funds and income from such funds have been proposed. The goal is that the rules to a greater extent take into account the composition of the securities in the funds.

Securities funds will still be regarded as separate tax subjects and will continue to follow the taxation rules for companies. The special rule providing that securities funds are exempt from taxation on capital gains and do not have the right to deductions for losses upon realization of shares in companies resident outside the EEA, is proposed maintained. The amount of the distribution which is to be considered as interests, should be calculated according to a set pattern based on the share of the interest bonds in the fund.

It is proposed that the personal unitholders are taxed as follows:

• Distributions from securities funds owning more than 80% shares are taxed as dividends.
• Distributions from securities funds owning less than 20% shares are taxed as interest income.

The proposed provision for disapplying the participation exemption method on hybrid instruments will not apply to deductions for the part of the distribution representing interest in securities funds.

Please see the separate article on the amendments of the rules on taxation of securities funds.

Solvency II - tax deduction for allocations in insurance companies

The Ministry of Finance released a consultation proposal on 21 May 2015 where they propose to change the Norwegian Tax Act section 8-5. According to the proposal, the tax deduction should be based on technical results under the new Solvency II regulations, with effect from the income year 2016.

The Ministry of Finance has considered the input from the consultation process and has come to the conclusion that it is necessary with more time to review the proposed amendments.

Please see a separate article about the Solvency II proposal.

Tax deductions under the R&D tax incentive scheme (SkatteFunn): Modifications of the limit amounts

The maximum deductibility basis (cap) for internal research and development (R&D) costs is increased from NOK 15 million to NOK 20 million.

The cap for R&D outsourced to approved research institutions is increased from NOK 33 million to NOK 40 million. The sum of the deductions for both internal and outsourced R&D may not exceed NOK 40 million.

Adjustment of the economic rent tax on hydroelectric power plants and the special tax on petroleum activity

Due to the reduction in corporate income tax from 27 % to 25 %, the Government proposes to increase the economic rent tax on hydroelectric power plants and the surtax on petroleum activity with two percentage points to 33 % and 53 %, respectively. Thus, the total marginal tax rate will be unchanged for the year 2016.

Amendment of the rules on deductions for costs connected to income comprised by the participation exemption method

The Government proposes an amendment of the right to deduct transaction costs related to share acquisitions that are not carried out. At present, deductions are only limited for “acquisition and realization costs” according to the Norwegian tax Act section 6-24 (2). The Ministry of Finance proposes to amend the provision so that costs related to share acquisitions that are not carried out, are not deductible. The Ministry claims that this will not constitute a change of current law, but merely a clarification. In our view, this clarification must be considered a plea in the ongoing court proceedings where this exact question is to be resolved.

Withholding tax on royalties, interest and certain rent payments shall be further assessed

The Ministry of Finance will further assess the Scheel committee’s proposal to introduce withholding tax on royalties, interests and certain rent payments. The Ministry agrees with the committee that any legal basis for withholding tax should go as far as the EEA law allows.

In line with the Scheel committee, the Ministry also finds that it should be assessed whether income from bareboat charting should be exempt from the tonnage tax regime so that these payments may also be comprised by the withholding tax.

Tightening of the tax residence definition

The Scheel committee recommended that Norway tightens the tax residence definition in the Norwegian Tax Act section 2-2 first paragraph. The committee held that Norway should supplement the criteria so that a company established in Norway always will be regarded resident in Norway for tax purposes. The amendment will entail that companies established in Norway always will be viewed as resident here, unless a tax treaty with the other state leads to a different result. This means that companies established in Norway can not avoid being tax resident in Norway based on Norwegian tax law alone. Furthermore, companies established in Norway will never be “state-less”. The Ministry of Finance finds that the committee’s proposal to supplement the criteria is well founded. The Ministry will review the criteria with a view to submitting a consultation proposal.

Statutory anti-avoidance rule

The Ministry of Finance finds that the Scheel committee’s proposal to codify the Norwegian general anti avoidance rule (GAAR) is well founded. Therefore, the Ministry has hired Professor Emeritus Frederik Zimmer at the University of Oslo to further review the question. Zimmer’s report is to be ready in spring 2016.

Country by country reporting

The Ministry is of the opinion that the country by country reporting will be a useful tool with respect to the tax authorities’ supervision work. Further, it is important that Norway contributes in the international process by introducing country by country reporting in group relations within the frames agreed upon by the member states in the BEPS-project. The Ministry will distribute a consultation proposal regarding an amendment of the law with associated regulations. 

To ensure that the Norwegian tax authorities have the best basis for their tax assessments, Norwegian tax payers should, according to the Scheel committee, also have an obligation to, upon request, gather information which is available in other group companies abroad. The Ministry agrees with the committee that there are good reasons to impose such an obligation on the Norwegian tax payers, for example regarding resale prices to third parties. Before implementing such a proposal, it is, however, necessary to further consider the most suitable sanction upon breaches of the disclosure obligations and whether there will arise jurisdictional questions etc. 

The participation exemption method is continued for cross-border share income

The Scheel committee pointed out that the participation exemption method may apply to share income from foreign resident companies, even when the tax level in that other state is substantially lower than the Norwegian tax level. This may give incentives to invest abroad instead of in Norway. The alternative to the participation exemption method as a means to avoid taxation on multiple company levels is to grant credit for corporate tax paid by the foreign subsidiary. The Ministry of Finance agrees with the committee that a transition from the participation exemption method to a method of granting credit for corporate tax in the underlying company, will complicate the legislation. Therefore, the Ministry finds that the participation exemption method should be continued for cross-border share income. 

The CFC rules to be further assessed

The Ministry will further consider the CFC rules with a view to submit a consultation proposal. An important goal for this work is to make the rules more practicable. The Ministry will assess whether the present separation between active and passive income is serviceable. In this connection, the Ministry refers to the fact that CFC rules are included as an action point in OECD’s work on profit shifting.

No changes are proposed with respect to withholding tax on dividends

The Ministry proposes no changes on the existing rules on withholding tax on dividends, to be able to prevent special cases of flow through.

Other proposals relating to the taxation of share income

The Government has proposed several amendments to the rules on the taxation of share income:

• Increased taxation of dividends to personal shareholders through an adjustment of the basis for taxation with an upwards adjustment factor of 1.15.
• A company’s loan to a personal shareholder shall, from a tax perspective, be treated as dividend. The rules are also proposed to apply to loans from other group companies and to third-party loans that are secured by pledges from the company.
• Tightening of the rules for extra taxation of interests on loans from person to company. The tightening entails that the rules shall also apply to debentures that are subject to trade in organized markets.

Changes in the amortization rates and asset groups

In the tax reform report, the Government has followed up on the Scheel committee’s recommendation and proposed amendments in the amortization rules.