The Government proposes in the National Budget, which was presented on 7 October 2020, to introduce a legal basis for withholding tax on interest, royalties and certain lease payments to related companies in low-tax jurisdictions. The proposal has been subject to consultation, and the Ministry of Finance received extensive input during the consultation period.
The most important changes in the updated withholding tax proposal compared with the proposal that was sent out for consultation in February are the following:
- The Ministry proposes that withholding tax is also imposed on lease payments for ships, rigs, aircrafts, etc.
- Withholding tax on royalty and certain lease payments is limited to payments made to related companies in low-tax jurisdictions. However, the Ministry warns that it may later be considered to extend the rule to also include royalty and lease payments to companies resident in normal tax jurisdictions.
- A general exemption from withholding tax is introduced for payments to related companies that are actually established and conduct genuine economic activity within the EEA.
- The withholding tax obligation arises at the time the recipient of the interest, royalty or lease payment receives an unconditional right to the payment, as opposed to the time of payment.
The main object of the proposals is to counteract profit shifting from Norway in the form of high deductible interest-, royalty- and lease payments to related parties abroad with a lower income tax rate than in Norway. Another object is to prevent income from not being taxed, or being low taxed, at the hands of the recipient. For withholding tax on lease payments, the Ministry states that the purpose of the measure is to counteract tax planning through establishing ownership structures in low-tax jurisdictions, and to limit the possibility of shifting profits out of Norway. The Ministry further states that it is probable that a withholding tax of 15 per cent on rig rental etc. will act as a “stop rule”, and that the enterprises as a result of the withholding tax will have to restructure. According to the Ministry, such restructuring will, for example, involve restructuring ownership to countries with a normal tax regime, or countries where Norway is precluded from imposing withholding tax in accordance with a double tax treaty. Even though this may mean that Norway will still not have the right to tax the income, this will according to the Ministry be a desired effect of the rules.
The withholding tax rate is proposed to be 15% on gross payments. The Ministry argues that the withholding tax rate in principle should correspond to ¾ of the Norwegian corporate tax rate (22%) as proposed by the Tax Committee, but that it should be lower in order to take into account that the withholding tax is levied on gross payments and not a net basis. The Ministry further argues that a lower rate than 15% would be unfavourable for Norway in those cases where the double tax treaty provides an opportunity to impose a 15% withholding tax.
The domestic withholding tax rate will in many cases be limited by provisions for a lower withholding tax rate on interest and royalties in double tax agreements, or alternatively eliminated in full. During the consultation process, proposals have been made for introducing thresholds and/or basic allowances for the withholding tax obligation for interest and royalty payments to apply. In the Ministry's assessment, such a rule would contradict the object of the withholding tax and could open up for tax motivated circumventions.
The proposed rules are proposed to enter into force with effect from 1 July 2021. All payments within the scope of the proposed withholding tax rules paid post effective date, will as a starting point be subject to withholding tax.
The proposed withholding tax rules will especially impact the shipping and offshore industry. We refer to the separate blog post for a more detailed review.
We will in the below present further details of the proposal.
Details of the proposal
Payments subject to withholding tax
Withholding tax will be levied on the following outbound payments to related companies resident in low-tax countries outside the EEA:
- interest payments;
- remuneration for the use of-, or the right to use intellectual property rights such as copyrights, patent rights, design rights, licenses, trademarks, know-how, trade secrets, etc. (royalty);
- remuneration for leasing of ships, vessels, rigs, etc., as well as aircraft and helicopters.
The relevant interest, royalty and lease payments are proposed to be subject to withholding tax only if the payments are made by:
- companies tax resident in Norway,
- partnerships where at least one participant is tax resident in Norway, and
- foreign companies that conduct taxable business activities in Norway through a branch.
As a starting point, payments from companies subject to special tax regimes are also within the scope of the proposed withholding tax rules, however exemptions are proposed for lease payments from tonnage taxed companies, see separate blog post.
It is clear that payments from partnerships where all participants are subject to Norwegian tax of their proportionate share of net profits, will clearly be covered by the rules. As for partnerships, PwC argued during the consultation period that withholding tax can only be withheld from the proportionate share of the partnership's payments that relates to participants who are tax resident in Norway. The Ministry shares our view and has clarified this in the commentary of the revised proposal. Further, it is clarified that for payments to partnerships, withholding tax shall only be deducted from the proportionate share of the payment that relate to participants in the recipient partnership resident in low-tax countries outside the EEA. These distinctions may be particularly relevant for shipping companies, see separate blog post.
The proposed rules only apply to payments to related parties and not to third parties.
Two companies are considered "related" when there is direct or indirect common ownership or control of at least 50%. If the requirement for ownership or control is met at some point during the income year before the payment is dated the payment is subject to withholding tax. This is a change from the consultation proposal, which proposed that withholding tax was to be levied if the requirement for ownership or control was met at some point in the income year, regardless of whether this was before or after payment.
The proposed withholding tax does not apply to payments to Norwegian branches of foreign companies as these branches would be taxable to Norway on activities performed and the income received.
Further details on the withholding tax on interest
It is proposed that the new withholding tax rule shall apply to payments to related parties in low-tax jurisdictions outside the EEA. Interest payments on loans from third parties, such as loans from financial institutions and bond loans, shall not be subject to withholding tax. Furthermore, interest payments to related companies in normal tax jurisdictions will not trigger withholding tax. The rule will have a limited scope compared with the Tax Committee's proposal to introduce a general withholding tax on interest (NOU 2014: 13).
Most of Norway's effective double tax treaties do not allow for withholding tax on interest, and the proposed rule will therefore have a limited effect on lenders resident in countries where Norway has entered into a tax treaty. The new legal authority to impose withholding tax will mainly impact lenders resident in low-tax jurisdictions where there is no treaty protection.
The definition of interest used in the proposed withholding tax rule shall correspond to the definition applied under the Norwegian law which has been developed by case law and is characterised as "remuneration to the lender as consideration for credit". In the case of financial leasing, it must be considered whether the interest element under the leasing agreement is within the scope of the withholding tax rule.
The term «low tax jurisdiction» is deemed to exist if the recipient company's effective income tax is less than ⅔ of the effective tax the company would have been levied in Norway, had it been resident in Norway. The test can be especially complicated when assessing hybrid cases, e.g. if the interest payment is made to a foreign entity that is considered a hybrid for Norwegian tax purposes or if the payment is classified differently at the hands of the payee. The Ministry states in the commentary that any simplifications in the low tax jurisdiction provision must be considered in a broader context.
According to the updated proposal, the tax liability for withholding tax will arise at the time when the recipient receives an unconditional right to the interest, and not when the interest is actually paid. For loans where the interest is accumulated as part of the principal, the withholding tax liability will arise when the interest accrues, even though there is no payment of interest in which the withholding tax can be withheld. In our opinion, this is an onerous rule as the debtor often will not have the liquidity to advance the creditor's tax on future interest payments. It is also very unfortunate that this part of the proposal was not subject to a consultation process. Further, there seems to be a mismatch between the proposed timing for constituting tax liability and the proposed rules for withholding at source and reporting to the tax authorities, see further details below.
Interest accrued before the withholding tax rules enters into force will not be subject to withholding tax.
Interest payments from a permanent establishment in Norway to a related party resident in a low tax jurisdiction are within the scope of the withholding tax.
For Norwegian branches of foreign companies where the applicable double tax treaty is based on OECD's model tax agreement from 2010, the Authorized OECD Approach (“AOA”) is used as the basis for determining costs and income. When the functional analysis entails that the branch is allocated capital to «finance its investments», deductions can be made for interest on the company's debt that exceeds unrestricted equity. In our consultation statement, we argued that such interest allocations cannot be classified as payments from the branch to a related company because it concerns a transfer within the same legal entity, and therefore that no withholding tax should be levied. The Ministry agrees that such interest should not be within the scope of the proposed withholding tax rules.
The Ministry maintains in its proposal that there shall be no harmonisation between the Norwegian interest limitation rule and the withholding tax rule. This means that withholding tax on interest will be levied regardless of whether the interest cost is deductible in Norway or not.
Withholding tax on royalty-and lease payments
Payments for the use of intellectual property rights
Withholding tax on royalty payments will apply for the use or leasing of intangible assets such as copyrights, patent rights, design rights, trademarks, licenses, know-how and trade secrets.
The impact of the withholding tax on royalties is uncertain, as it targets payments to related parties in low-tax countries where the double tax agreement allows for withholding tax, and countries with which Norway does not have a tax treaty. Norway has not previously had a domestic legal authority to impose withholding tax on royalty, and it has therefore not been Norway's tax treaty policy to negotiate provisions that give right to impose a withholding tax on royalty payments. As it is expected that the existing tax treaties will be renegotiated so that withholding tax on royalties will be more effective in the future there is a potential for a larger impact than under the current treaty landscape.
Withholding tax on lease payments for certain physical assets
As referred to above, the Ministry proposes that withholding tax is introduced on lease payments for certain physical assets (ships, rigs, machinery, vessels, aircraft, helicopters, etc.) to related companies resident in low-tax jurisdictions. During the consultation period, the Ministry received several submissions pointing out that withholding tax on lease payments for physical assets will be detrimental and particularly burdensome for the offshore industry. Furthermore, it has been commented that no profit shifting takes place in these situations, simply because the foreign rig owners have had very low or no profits historically. The Norwegian operating companies (lessees), on the other hand, usually report a profit, which indicates that the lease payments are not artificially high. Furthermore, it has been pointed out in the consultation that the introduction of withholding tax on lease payments may lead to a reduction in the total tax revenue in Norway, and that the withholding tax may exceed the companies' profits and make the Norwegian continental shelf less attractive for foreign investors. All of which may affect employment in the offshore sector.
The Ministry has commented on but not taken into account input received during the consultation. It signals that foreign investors investing through companies resident in low-tax jurisdictions are not wanted even if their establishment and operation are commercially justified. The Ministry further accepts that the industry may be forced to restructure, and that potential countermeasures may lead to higher costs for the oil companies operating on the Norwegian continental shelf.
Somewhat surprisingly, the Ministry also stated that the withholding tax is not only intended to apply to bareboat lease payments. Also time charter lease payments shall be decomposed so that withholding tax can be levied on the lease element. In our view, it is difficult to understand that the proposed rules concerning "remuneration for use or the right to use" should include any part of a time charter lease payment which is a payment for the performance of a service, work assignment or collective transport service. Notably, the proposal does not contain any guidelines as to how such a decomposition may be done or is intended to be carried out.
Norwegian tax treaties based on the OECD model agreement do not give the right to impose withholding tax on the lease of physical assets, while tax agreements based in whole or in part on the UN model agreement may have a definition of the royalty term that includes the lease of industrial equipment. As most of the Norwegian double tax treaties are based on the OECD model it will be necessary to change the definition of “royalty” in numerous of Norway's double tax treaties for the proposed withholding tax rule to have full effect vis-à-vis Norway's tax treaty counterparties.
For more information and details of the withholding tax proposals impact for the shipping and offshore industry, we refer to a separate blog post.
EEA aspects of the proposal
The Ministry proposed in the consultation paper that payees who are actually established within the EEA would have the opportunity to choose an alternative net taxation method with 22% tax instead of a gross withholding tax at 15%. In the proposal for the National Budget for 2021 the Ministry has abandoned the alternative method and instead limited the application of the withholding tax rules to payments to related companies in low tax jurisdictions.
As imposing withholding tax on interest-, royalty- and lease payments may constitute an illegal restriction from the right of establishment under the EEA agreement. The Ministry claims that with such a limited withholding tax, there exists a differential treatment of payments to low tax countries within the EEA, which will be subject to withholding tax, and payments to normal tax countries, which will not be subject to withholding tax. The Ministry proposes that companies that are genuinely established, and conduct real economic activity, in an EEA state are exempt from withholding tax on interest, royalties and lease payments.
In order to benefit from the exemption, the Ministry proposes that the company subject to withholding tax must document that it is genuinely established and conducts real economic activity in an EEA country. Furthermore, it is proposed that a condition for benefitting from the exemption is that Norway may require disclosure of information from the state of establishment pursuant to a double tax agreement or another agreement under international law. If there is no such agreement, a declaration must instead be submitted from the tax authorities in the taxpayer's state of establishment confirming that the documentation is correct. The same documentation requirements apply to the treatment of genuinely established companies in the EEA under the Norwegian participation exemption method and the NOKUS/CFC rules.
Application towards NOKUS/CFC entities
The Ministry's proposal for withholding tax on interest and royalties etc. will also include payments to NOKUS/CFC companies, i.e. Norwegian controlled limited companies etc. resident in low tax jurisdictions. Norwegian shareholders in NOKUS/CFC companies should, however, not be subject to double tax for income already taxed through the NOKUS/CFC taxation. The Ministry therefore proposes that Norwegian participants in NOKUS/CFC companies shall be entitled to a deduction in their Norwegian tax for a proportionate share of the withholding tax. Such regulations have not yet been finalised and will require further work. The Ministry will propose such provisions in the revised National Budget for 2021 at the latest.
Assessment and payment of the tax
Withholding and reporting obligations for the payer
The Ministry proposes that it is the Norwegian company or branch that makes the interest, royalty or lease payment that will determine the withholding tax deduction, as well as pay and report the withholding tax to the tax authorities. As a starting point, the foreign company does not have any reporting obligations, provided that there is no need to change the withholding tax, cf. below.
The tax liability for withholding tax is, as mentioned, linked to the point in time when the recipient has an unconditional right to the payment regardless of whether a payment actually takes place. The proposed provision in the Tax Payment Act § 5-4b, on the other hand, links the obligation to withhold tax to the “payment”. The Ministry emphasises that the withholding obligation is not limited to what appears to be ordinary payments, and that a broad interpretation of the term "payment" must be used. Based on the context, it seems clear that the Ministry is referring to situations where a settlement takes place with other forms than cash, and it is further assumed that a "transfer" must take place in order for a withholding obligation to arise.
However, there is a very unclear connection between the proposed regulations as the Ministry has changed the timing of when the tax liability arises to the time when the recipient has an unconditional right to the interest, royalty or lease. It can hardly be the intention that a Norwegian lender shall make daily determinations and payments of withholding tax in accordance with loan agreements where the right to interest is accumulated per day, or for leases where the rig owner continuously obtains the right to lease payment by making the rig available. If the determination and payment of withholding tax is to take place on an ongoing basis as an unconditional right to the payment arises regardless of the actual payment, there should at least be provided rules that limits the assessment and withholding obligations to specified periods, e.g. annually. However, as the proposed rules in the Tax Payment Act are formulated, it is difficult to see that these provide a legal basis for imposing a withholding tax- and payment obligation before the actual payment or settlement takes place.
The reporting and payment deadline for the withholding tax is 7 days after the "payment", see above for a discussion of this term. The Norwegian company or branch that is responsible for withholding may change the withholding tax deduction for a three-year period starting from the original reporting and payment deadline, e.g. interest subject to withholding tax paid on 15 July 2021 is to be reported and paid by 22 July 2021. The final deadline to amend the withholding report will be 22 July 2024.
Refund scheme for payee
The payee can also apply for a refund of withholding tax if entitled to a lower withholding tax rate. The deadline for applying for a refund is 3 years after the end of the year in which the withholding tax is assessed. This means that the payee must apply for a refund by 31 December 2024 for a withholding tax on interest and royalties imposed during 2021. We noted in the consultation statement that the deadline for applying for a withholding tax on interest and royalties will thus be significantly shorter than the deadline for applying for a refund of withholding tax on dividends, which is 5 years after the end of the year when the withholding tax is assessed. The Ministry points out that the deadline for applying for a refund of tax pursuant to special rules on taxation of foreign employees etc. (withholding tax scheme) is three years, so this should also be a sufficient deadline for applying for a refund of withholding tax on interest and royalties etc. We maintain the position that there are good reasons for applying the five year rule for withholding tax refunds as is for withholding tax refund on dividends.
Joint liability for the withholding tax
A company that pays interest or royalty that is subject to withholding tax will have joint and several liability for the withholding tax to be deducted from the payment. This means that if the Norwegian company or branch has deducted too little withholding tax, it will be responsible to pay the withholding tax in the event of a new self-assessment or reassessment decision by the tax office.
An exception to this joint and several liability will be if the Norwegian company or branch can demonstrate that the lacking deduction is not due to neglect or lack of due care. The Ministry has considered, but chosen not to propose, rules for pre-approval and documentation requirements that may exempt the paying companies from the joint liability for withholding tax. The reason is that such arrangements are likely to be administratively burdensome for the taxpayer and for the Tax Administration, and that taxpayers are assumed to have or could easily obtain the necessary information since the parties are related.
In order to obtain clarification of whether a specific payment is subject withholding tax and at what rate the payer will therefore need to withhold tax at 15%, and then the payee can apply for a refund. PwC noted in the consultation that this is far more burdensome than a voluntary scheme with pre approval supplemented by specific documentation requirements that exempt companies making the payment from the joint liability. Such exemption from the joint liability already exists for withholding tax on dividends, and it is difficult to see that a similar scheme cannot be made for withholding tax on interest, royalty and lease payments.
There are no proposed rules for imposing penalty tax in the absence of withholding tax deduction. This can be seen as a natural consequence of the fact that it is not the same subject that determines the withholding tax which is the taxable person.
PwC's view on the proposal
Our general view is that the Ministry to a greater extent should have taken into account the comments submitted during the consultation, which called for a more thorough analysis of the necessity and impact of the proposal before the withholding tax is established by law. In the White Paper, the Ministry does not specifically explain or substantiate the need for withholding tax, in particular with regards to withholding tax on lease payments for physical assets.
The proposed withholding tax rate at 15% of the gross payment will in many cases lead to a higher taxation compared to taxation on a net basis. Lenders, owners of intangible assets and lessors of fixed assets will most often have limited margins, which means that 15% of the gross lease payment constitutes a much higher taxation than 22% tax on the net margin. Counteracting ownership structures in low tax jurisdictions seems to be the main purpose for the proposed rules regardless of whether the structures are commercially justified or whether the Norwegian tax base is reduced.
The Ministry claims that the withholding tax proposal is in line with the ongoing work in the Inclusive Framework group directed by the OECD to counteract profit shifting. We believe that the Ministry's proposal goes far beyond the purpose of counteracting profit shifting, and also OECD's proposal to ensure a global minimum taxation. A very important premise in the proposal from the OECD is that all measures to ensure a global minimum taxation, which withholding tax shall, must be limited to the taxation of payments that represent profits. The preliminary proposals from the OECD contain detailed rules for how net taxable profit is to be determined for companies resident in countries where they are subject to low or no taxation. We believe that the Ministry of Finance should, as a minimum, propose an “escape clause” which means that companies are given the right to document their profits/losses in line with the OECD proposal. This is especially important for withholding tax on lease payments for physical assets, which under the current proposal in effect will be a turnover tax that far exceeds the companies' profits, and which can be detrimental for the Norwegian offshore sector and workplaces.
We further believe that alternatives to introducing withholding tax on lease payments for physical assets should have been discussed and documented. The Ministry of Finance states that it is difficult to determine an arm's length lease in such lease structures as there are no comparable transactions. We are of the view that arm's length leases in fact have been determined in a satisfactory manner in all cases we have been involved in. On the other hand, further work can be carried out in order to prepare reasonable models for calculating an arm's length lease for high value operating assets within the aviation-, shipping- and offshore sector. As another alternative, we believe the Ministry should have reviewed the possibility to introduce schemes whereby the tax authorities agree on an arm’s length price with the taxpayer for a fixed period (Advance Pricing Agreement - APA), similar to several European other countries.
We believe it is unfortunate that the tax liability for the withholding tax is linked to the point in time when the recipient receives an unconditional right to the payment, and not when payment is actually made. This means that the withholding liability arises even if there is no flow of funds in which tax can be withheld. There is also a very unclear connection between the proposed rules on tax liability and the obligation to withhold tax, and we expect that it will be necessary to adjust the regulations.
Furthermore, we believe that in practice it will be very difficult, if not impossible, to enforce the proposal to impose withholding tax on payments made by foreign partnerships with Norwegian partners. This applies in particular to the proposed reporting and payment obligations to be imposed on the Norwegian partners.
On the positive side, the updated proposal limits the scope of withholding tax to royalties and lease payments to related parties in low tax jurisdictions. Further, a general exemption from withholding tax is introduced for companies that are genuinely established and conduct real economic activity in an EEA country. In addition, the Ministry in the White Paper provides clarifications on several issues that were unclear in the original proposal, such as withholding tax on payments to partnerships and NOKUS/CFC companies with non-Norwegian partners, as well as payments from such companies.
This blogpost is written by Aija Rusina, Elin Sund, Marius Aanstad, Morten Beck and Hilde Thorstad.
Jeg heter Hilde Thorstad, er partner i Advokatfirmaet PwC, og leder firmaets avdeling for shipping, offshore og oljeservice. Jeg har mer enn 18 års erfaring med skatterådgivning overfor norske og multinasjonale konsern. Mine spesialområder er norsk og internasjonal bedriftsbeskatning, herunder restrukturering over landegrensene, transfer pricing og EU/EØS-skatterett, samt rådgivning til aktører innenfor shipping, offshore og oljeservice.
My name is Hilde Thorstad and I am a partner in PwC Tax & Legal Services. I have more than 18 years of experience with advising Norwegian and multinational groups. I assist clients with general tax advice on Norwegian and international corporate tax law, including cross border restructurings, transfer pricing and EU/EEA tax law, and have a special focus on shipping, offshore and oil service industries.