On February 27, 2020, the Ministry of Finance released a discussion paper with proposals for introducing withholding tax on interest and royalties, etc. The discussion paper follows up on the proposals of the Scheel Committee in NOU 2014:13 (Capital Taxation in an International Economy), which proposed a number of measures to counteract profit shifting. The paper has been expected for a long time, and there has been great excitement related to the proposals.
The Ministry proposes to introduce a limited withholding tax rule that only affects interest and royalty payments to related companies. In addition, for withholding tax on interest payments, it is proposed that the related company receiving the payment should be resident in a low-tax country. It is also considered whether the withholding tax liability for royalty should include lease payments for certain physical assets to related companies abroad.
In the corporate sector, Norway previously only had rules on withholding tax on dividends to foreign shareholders.
The main purpose of the proposals is to counteract profit shifting from Norway in the form of high deductible interest and royalty payments to related recipients abroad. Furthermore, it is an objective to counter double non-taxation in those cases where the income is not taxed or subject to low tax on the recipient's hand.
The proposed withholding tax rate is 15% of gross payments. The Ministry argues that the withholding tax rate in principle should correspond to the Norwegian corporate tax rate (22%), but that the tax rate should be set somewhat lower to take into account that the tax is imposed on gross cash flows. In our view, in most cases, a withholding tax rate of 15% will not adequately take into account the difference in taxation on a gross basis as opposed to a net basis. The recipients of the payment will often have limited margins that imply that 15% tax on the gross payments could considerably exceed an alternative 22% tax on the net margin. For lenders, margins of this magnitude will be uncommon, as for licensors of intellectual property and lessors of physical assets that may be affected by the proposal. The Ministry does not seem to have considered the proposal against the OECD's Global Anti-Base Erosion Proposal (GloBE), which presupposes that measures to promote a global minimum taxation should only involve the taxation of payments that represent profits.
In many cases, the domestic withholding tax rate will be limited by provisions on taxation of interest and royalties included in tax treaties with other countries, or will lapse completely. For interest and royalty payments to related companies that are effectively established within the EEA, it is proposed that the recipient may alternatively choose a system with net taxation.
The Ministry proposes that the rules shall enter into force with effect from 1 January 2021. All payments covered by the proposed withholding tax rules made after the effective date are subject to withholding tax. It is therefore the time of the payment that, according to the proposal, decides whether withholding tax should be paid and not when the right is accrued. The proposal can therefore affect accruals during 2020.
Interested parties are invited to present their comments on the discussion paper by 27 May 2020.
We will present the proposal in some more detail below. The proposal will have some special effects for the shipping and offshore industry. We refer to the specific blog post for a closer review.
Details of the proposal
Payments subject to withholding tax
The duty to pay withholding tax will according to the proposal, include:
- interest payments to related companies resident in low-tax countries (where the interest rate limitation rule is assumed to have limited or no effect);
- remuneration to related companies abroad 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), as well as, where applicable, certain physical assets. For these payments, there is no condition that the recipient of the remuneration is resident in a low-tax country.
The relevant interest and royalty payments shall be subject to withholding tax if they are made by companies resident in Norway, companies where taxation is made at the participant level, as well as foreign companies that carry out taxable activities here through a Permanent Establishment. Payments from companies subject to special tax regimes are also included, but special rules are proposed for payments from companies subject to tonnage tax, see separate blog post.
For companies where the taxation is made at the participant level and where all participants are subject to Norwegian taxation of their proportionate share of net profits, the payment will clearly be covered by the rules. If some of the participants are not subject to ordinary Norwegian tax liability, it must be assumed that withholding tax only can be deducted from the proportionate share of the company's payment that relates to participants who are Norwegian taxable companies. This may be especially relevant for shipping companies, see separate blog post.
The proposed rules apply only to payments to related parties and not to payments to independent parties.
Two companies are to be considered “related parties” when there is direct or indirect ownership or control of at least 50%. The interest / royalty payment shall be subject to withholding tax if the requirement for ownership or control is fulfilled at any time during the income year.
If the recipient participates in activities that are carried out or managed in Norway, and therefore is subject to limited tax liability for the payment in accordance with the rules in the Tax Act Section 2-3 first paragraph, letter b, no withholding tax shall be paid.
Details on withholding tax on interest
It is proposed that the new withholding tax rule should apply to payments to related companies in low-tax countries. Interest payments on loans from independent 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 countries will not trigger withholding tax. The rule will thus have a limited scope compared to the Scheel Committee's proposal to impose a general withholding tax on interest (NOU 2014: 13).
Norway’s current tax treaties often do not allow withholding tax to be levied, and the proposed rule will therefore have limited effect on lenders in countries Norway has entered into a tax treaty with. A new legal basis for imposing withholding tax will, from the outset, mainly have an impact on lenders in low-tax countries with which Norway does not have a tax treaty.
The interest rate concept used in the withholding tax rule must, according to the proposal, correspond to the ordinary tax law interest concept developed in case law and characterized as "remuneration to the lender as consideration for credit extension". In the case of financial leasing, it must be considered whether the interest element in the lease is covered by the withholding tax rule.
The term "low-tax country" is to be understood in the same way as in the tax legislation, that is, the payee will be considered established in a low-tax country if the company's ordinary income tax on the company's profits amounts to less than ⅔ of the tax the company would have been levied in Norway. A general comparison must be made of the difference in the level of ordinary income tax in Norway and in the other state for the type of company in question. Special issues for the low-tax country assessment may arise in hybrid cases, either by making the interest payment to a foreign entity that is hybrid for Norwegian tax purposes or if the payment is classified in another way with the payee.
The proposal to pay withholding tax must, according to the proposal, be linked to the time of payment and not to the time when interest accrues. No exemption from withholding tax is proposed for interest accrued prior to the entry into force of the withholding tax rules. For loans where interest accumulates as part of the principal, it will therefore be of great importance whether the maturity date is before or after the end of the year 2020/2021.
Interest payments made to a qualified recipient that is attributed to a Norwegian permanent establishment of a foreign company shall be subject to withholding tax. Without being specified in the proposal, it must be assumed that the obligation to pay withholding tax must also follow the payment date in these cases, and not any earlier date when interest accumulates and is charged to the Norwegian branch accounts.
For Norwegian branches of foreign companies where Article 7 of the tax treaty is based on the 2010 OECD's model tax treaty, the “Authorized OECD Approach” is used in the determination of costs and income. When the functional analysis results in the branch being allocated capital to "finance its investments", deductions can be made for interest on the company's debt that exceeds free equity. We assume that such an interest deduction will not be classified as payment from the branch to a related company and therefore no withholding tax is payable on the amount.
The Ministry proposes that there should be no coordination between the interest rate limitation rule and the withholding tax rule for interest. This means that withholding tax on interest must be levied regardless of whether the person paying the interest has a right to deduct the interest in Norway.
Withholding tax on royalty payments
Payments for intellectual property use
The withholding tax on royalty payments will apply to the use or lease of intellectual property such as copyrights, patent rights, design rights, trademarks, licenses, know-how and trade secrets.
Contrary to what is proposed in the rule on withholding tax on interest, there should be no condition that the related party is resident in a low-tax country.
It is uncertain how large the scope will be for withholding tax on royalties, since it will only cover payments to related parties in countries where the tax treaty allows for withholding tax on royalty payments and countries with which Norway does not have a tax agreement. Norway has previously had no internal legal basis for imposing withholding tax, and it has therefore not been Norway's tax treaty policy to negotiate treaty provisions that give the right to impose withholding tax. In the longer term, withholding tax can have a somewhat wider scope, since it must be expected that the tax treaties are renegotiated and withholding tax on royalty is accepted.
Withholding tax on lease payments for certain physical assets
The Ministry is also considering whether the tax obligation should include payments to related companies abroad for the lease of certain physical assets (ships, rigs, machines, vessels, aircraft, helicopters, etc.). The Ministry will further consider whether such lease payments should be included in the final proposal in light of the comments received on the discussion paper. In the event of the introduction of withholding tax on lease payments for physical assets, it will also be necessary to change the definition of "royalty" in several of Norway's tax treaties if the internal rule is to have full effect on our tax treaty counterparties. Tax treaties based on the OECD model tax treaty do not give the right to impose withholding tax on the lease of physical assets, while tax treaties based wholly or partly on the UN model tax treaty may have a definition of the royalty term that includes the lease of industrial equipment.
The Ministry points out that there may be reason to also consider the need to introduce rules limiting the taxpayer's deduction when applying for special payments, such as bareboat hire for vessels and rigs. See separate blog post for a closer look at the proposal for the shipping and offshore industry.
EEA legal aspects of the proposal
The Ministry's discussion paper does not propose any general exemption for interest and royalty payments to recipients within the EU / EEA. However, the scope of the proposed rules is generally limited in that withholding tax is only applicable to payments to related companies. In order for withholding tax to be imposed on interest payments, there is also a requirement that the recipient is resident in a low-tax country.
Rules on imposing withholding tax on gross cash flows may constitute an illegal restriction under EEA law. For foreign lenders or asset owners, lending or leasing assets to Norwegian taxpayers may be more burdensome, and the deduction may make it less attractive for Norwegian companies to borrow capital from foreign lenders or to lease assets from foreign owners.
The European Court of Justice has previously considered the question of withholding tax in case against Portugal (C-18/15 Brisal), where interest paid to non-resident financial institutions was subject to withholding tax, while interest earned by resident financial institutions was subject to net taxation. The court concluded that the foreign payee should in principle be treated in the same way as the resident, with the possibility of deducting similar costs. Therefore, in order to take into account Norway's obligations under the EEA Agreement, the Ministry proposes an alternative with net taxation for companies subject to withholding tax that are genuinely established and conduct real economic activity in the EEA area. This means that recipients of interest and royalty payments within the EEA may choose between the imposition of withholding tax on:
- the gross payment, or
- net taxation in accordance with the general rules for capital and / or business taxation where costs related to the relevant loan or lease are deducted.
For licenses related to intellectual property rights, the Ministry proposes a strict understanding of the costs that can be associated with the relevant lease. Only costs related to the actual licensing itself will be deductible for the intellectual property used in Norway, while costs associated with the development of the licensed product itself will not be deductible. In our opinion, this will clearly entail a breach of EEA law, since a similar company resident in Norway would be entitled to deductions, among other things, for depreciation of acquisition costs, capitalized development costs, and any costs for further development necessary for the licensed product to retain its attractiveness, financial costs, etc. If a withholding tax is imposed on lease payments for certain physical assets, a corresponding deduction must be made for depreciation of the asset, maintenance costs, financing costs, etc. in order for a net tax to be compatible with EEA law. However, the proposed legislative text does not provide a correspondingly strict definition of the costs that should be deductible.
If the net taxation method is chosen, it follows from our assessment of EEA law that the payee must also be entitled to deductions for indirect costs that are considered necessary for the performance of the loan or the lease.
The taxpayer elects the net taxation method by filing a tax return stating the income and costs related to the loan or lease. The tax return must be filed within the normal deadlines the year after the withholding tax is paid. In the proposal, the Ministry proposes that taxpayers who qualify for net taxation will have freedom of choice between gross or net taxation, but that the choice must apply for the entire taxation period.
Relationship to the NOKUS rules
Withholding tax on interest payments and royalties may in part overlap with taxation according to the NOKUS rules (the Norwegian “CFC-rules”) and double taxation will occur if deduction is not granted to the Norwegian shareholders in the assessed NOKUS tax for any Norwegian withholding tax paid. The Ministry will investigate a solution by granting the Norwegian taxpayer a deduction in assessed NOKUS tax for a proportionate share of the withholding tax, or alternatively a deduction in NOKUS income for a proportionate share of the withholding tax payment.
Determination and payment of the tax
Duty and reporting obligation for the payer
The Ministry proposes that it is the Norwegian company or branch that makes the interest or royalty 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 withholding and reporting obligation for withholding tax on interest and royalty is linked to each payment, so that the withholding tax arises every time an interest or royalty payment is made that is subject to withholding tax. The discussion paper does not appear to indicate that the liability to deduct the withholding tax may arise already when the recipient is entitled to payment, such as when distributing dividends that are subject to withholding tax. The reporting and payment deadline for withholding tax on interest and royalty is 7 days after payment. The Norwegian company or branch that is subject to deduction may itself alter the withholding tax deduction during a three-year period that runs from the original reporting and payment deadline. If interest is paid on February 15, 2021, which will be subject to withholding tax, the reporting and payment deadline will be February 22, 2021. The last alteration deadline will be February 22, 2024.
Refund scheme for payee
Also, the payee can apply for a refund of withholding tax if he or she were to be entitled to a lower withholding tax deduction. The deadline to apply for a refund is 3 years after the end of the year the withholding tax is fixed. This means that an application for a reimbursement for withholding tax on interest and royalties imposed during 2021 must be filed by December 31, 2024. We note that the deadline for applying for reimbursement of withholding tax on interest and royalties will thus be considerably shorter than the deadline for applying for a refund of withholding tax on dividends, which is 5 years after the end of the year withholding tax is fixed. In our opinion, there will be good reasons for applying the same rule as withholding tax on dividends.
Joint liability for 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 alteration decision by the tax office.
A small exception to this joint and several liability will be if the Norwegian company or branch can demonstrate that the lack of deduction is not due to neglect or lack of due care. The Ministry has considered, but has so far chosen not to propose rules on advance approval and documentation requirements that may exempt paying companies from the joint and several liability for withholding tax on interest and royalties. The rationale is that such an arrangement will be administratively burdensome for the taxpayer and for the tax authorities, and that the taxpayer is assumed to have or can easily obtain necessary information since the parties are closely related. The person that has the duty to carry out the withholding will therefore be obliged to withhold withholding tax so that the payee must apply for a refund if it is to be clarified whether the withholding tax is to be levied for the individual payment. This must be considered significantly more burdensome than a voluntary pre-authorization scheme supplemented by specific documentation requirements that exempt paying companies from joint and several liability. Rules that exempt from joint and several liability already exist for withholding tax on dividends, and it is difficult to see that a similar system for withholding tax on interest and royalty payments cannot be made.
There are no proposed rules for imposing additional 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.
Net taxation for EEA companies
As previously mentioned, it is proposed that EEA companies that are subject to withholding tax on interest and royalty payments alternatively may request that the withholding tax is levied on a calculated net income at the ordinary tax rate. In such a case, the company must submit a tax return, which includes the income and expenses related to the loan or lease. Such tax return must be submitted within the normal deadlines for the year after the withholding tax has been levied, and the Tax Administration Act's rules for determining taxation also apply.
EEA companies will continue to be subject to withholding tax in the same way as other subjects, but this will be regarded as an advance tax for the net taxation in accordance with the proposed rules. This will result in a significant liquidity disadvantage for EEA companies, which in practice have to pay advance tax in the year before the assessment year, compared with Norwegian companies that pay advance tax in the assessment year. We do not see that such discrimination against EEA companies can be justified by compelling general considerations, so that the rule may be contrary to EEA law.
As mentioned, there is some uncertainty following the discussion paper regarding the costs that can be included in the Norwegian tax return. Reference is made to the discussion above of EEA legal aspects of the proposal.
This blog post is written by Aija Rusina, Eystein Aarseth, 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.