Proposed amendment to the Norwegian Interest Deduction Limitations

The Ministry of Finance has today issued a discussion paper related to amending the Norwegian interest deduction limitation rules. As informed in their letter to ESA earlier this year the proposed new rules will include limitations also on third party interest and two alternative escape clauses based on a consolidated debt to equity ratio.

Current Norwegian interest deduction limitation rules entail that interest from related parties are only deductible within 25% of the tax EBITDA of a company to the extent the net interest costs exceed a threshold of NOK 5 million. Interest on debt to unrelated parties is fully deductible, provided the debt does not benefit from a guarantee or similar from a related party.

The proposed new rules mainly entail the following:

• For Norwegian companies that form part of a group, as defined by rules for financial accounting, interest expenses on external debt will also be subject to limited deductions (25% of EBITDA).
  
• The Norwegian part of such a group is proposed to have a combined threshold of
  NOK 10 million for the limitations to apply.
  
• However, two alternative escape clauses for the rules are now also proposed under which the company or group can escape the limitations completely provided the following requirements are met;
  
  • The relevant company on a stand-alone basis has a debt to equity ratio similar to or stronger than the consolidated debt to equity ratio in the group which the company is a part of (defined by financial accounting rules).
    
  • If the Norwegian part of the group has a consolidated debt to equity ratio which is similar to or stronger than the consolidated debt to equity ratio in the wider group (defined by financial accounting rules).
• Detailed regulations on how to calculate the debt to equity ratio in the Norwegian part of a wider group has been set out in the proposal.

Our current analysis of the proposal suggests that the proposal may benefit Norwegian sub-groups of a group with external financing at topco level or in a separate finco, whereas the Norwegian subgroup is financed with internal loans. On the other hand, the proposal will first and foremost have adverse affects for the following types of groups:

• Norwegian headed groups with subsidiaries outside of Norway, where the subsidiaries outside of Norway are more lightly leveraged than the Norwegian group isolated.
  
• Norwegian sub-groups of a wider foreign group that have a higher leverage in the Norwegian sub-group than in the consolidated group.

The rules are proposed to come into effect as from the income year 2018, and the deadline for providing comments to the discussion paper has been set to 3 August 2017.