On Friday 17 April, the Act and Regulations relating to the temporary subsidy scheme were adopted, and shortly after, the Government launched the application portal for the new Business Compensation Scheme for enterprises with a significant drop in revenue due to the coronavirus situation. Already on Saturday 18 April, enterprises ordered to close by the State could apply for a subsidy. As from Monday 20 April, also other enterprises may apply, which means that all enterprises that have suffered a drop in revenue of more than 30 percent (20 percent in March) may apply for compensation for fixed unavoidable costs.
Simultaneously with the launching of the application portal, new Regulations were also adopted (Regulations concerning the supplementation and implementation of the Act of 17 April 2020 on a temporary subsidy scheme for enterprises with a significant drop in revenue, hereafter the “Regulations”). The Regulations provide a number of clarifications and specifications regarding the Compensation Scheme, and some of these are of particular importance to lessors and lessees. The most central clarifications and specifications are reviewed below:
1. Rent discounts are not considered as fixed unavoidable costs
The Government has previously stated that also lessors must take part in the national economic efforts now taking place. Many lessors want to do so, but it has so far not been clear how rent discounts will affect the compensation. The central question is whether rent discounts are to be taken into consideration when calculating what constitutes the lessee’s fixed unavoidable rent.
This question seems now to have been clarified through section 3-2(10) of the Regulations, which establishes that part of a fixed unavoidable cost that is reallocated because payment is waived or reduced, is not deemed to be a fixed unavoidable cost.
In practice, this interpretation means that a rent discount from the lessor implies a reduction of the amount the lessee is entitled to under the Compensation Scheme. This can be illustrated by the following example: A hair salon with a monthly rent of NOK 100 is entitled to a 90 percent compensation for its rent (i.e. NOK 90). If the lessor grants a rent exemption for the remaining NOK 10, the hair salon’s right to compensation will be 90 percent of NOK 90 (i.e. NOK 81).
Under this interpretation, the Compensation Scheme does not encourage the lessor to grant its lessees rent discounts, and it is consequently not congruent with the Government’s wish that also lessors should contribute. Wiersholm has therefore contacted the Ministry, asking whether this is a correct and intentional understanding of section 3-2(10) of the Regulations.
2. Fixed unavoidable costs must be assigned to the period in which they are incurred
It has been a somewhat open question how rental costs are to be accrued. Sections 3-2(7) and 3-2(8) of the Regulations now establish that the fixed unavoidable costs must be allocated over the period in which they accrue. As regards rent, it is explicitly stated that the rent must be distributed evenly over the period concerned.
This is of particular importance in two cases. Firstly, it is of no importance whether the rent is due monthly, quarterly or annually. If the lease agreement for example provides for an annual advance payment of rent, so that the 2020 rent has already been paid, it is nevertheless possible to claim compensation for 1/12 of this advance payment for the month of March. Secondly, it means, in our opinion, that suspensions of rent from the lessor do not affect the lessee’s right to compensation. If, for example, the due date for the rent for March 2020 is postponed to June 2020, it is nevertheless for the month of March that the lessee can report this rent as a fixed unavoidable cost.
3. Municipal infection control measures give no right to special compensation
As regards the size of the compensation, it has been announced that there will be a fundamental distinction between enterprises that are directly affected by public infection control measures and those that are not. While there for the first category will be an adjustment factor of 0.9 and no deductible when the compensation amount is calculated, the adjustment factor for the second category will be 0.8 with a deductible of NOK 10 000. It has been questioned whether municipal measures would lead to the same compensation as governmental measures.
The Regulations have now made it clear that only enterprises closed by the state pursuant to sections 14 and 16 of the Regulations of 27 March on infection control measures, will be granted the most favourable adjustment factor and avoid the deductible. These include, among others, gyms, hairdressers, physiotherapists, etc. Enterprises affected by municipal infection control measures, such as the ban on serving alcohol in the municipality of Oslo, will not be treated in the same way as enterprises affected by the governmental infection control measures.
4. Calculation of revenue reductions
Section 2-3 of the Regulations details how to calculate the revenue reduction of an enterprise. This will be of importance when establishing whether the enterprise satisfies the requirement of a 30 percent drop in revenue (20 percent for March), and when deciding which figure to use in the calculation of the compensation amount.
It has previously been communicated from the Government that the decisive factor is the percentage difference in revenue compared to the same calendar month in 2019. This has now been modified, as the enterprise’s percentage difference in revenue from the months prior to the corona outbreak (January and February) are taken into account. This is best explained by an example:
- A restaurant had a revenue of 20 in March 2020, as opposed to 100 in March 2019, which implies a drop in revenue of 80 percent)
- The restaurant had an increase in its revenue in January and February 2020 of 25 percent as compared to January and February 2019. This increase is taken into account by adding 25 percent to the restaurant’s revenue figure for March 2019.
- The result is that the restaurant is deemed to have had a revenue of 125 in March 2019. The drop in revenue for March 2020 is therefore 105 instead of 80, which gives a drop in revenue of 84 percent instead of 80 percent.
(NB: The example is based on a drop in revenue for March, but the principle will be the same for the calculation of reductions in revenue in April and May.)
Some enterprises were established less than one year before the calendar month for which subsidy is applied for or cannot due to restructuring of the enterprise find relevant revenue for calculation of compensation under the above method. Such enterprises must use the average monthly revenue for January and February 2020 as a basis for calculating the drop in revenue.
5. Value Added Tax
Pursuant to section 3-2(12) of the Regulations, it is not possible to apply for compensation for value added tax that can be deducted in the VAT statement. This is natural, since VAT that can be deducted is not an unavoidable cost. If VAT has been paid for sales for which payment is not received, for example due to bankruptcy of the lessee, one may request the tax authorities to make a correction pursuant to the scheme relating to losses on outstanding claims. This will thus not represent an unavoidable cost.
In some cases, the enterprise has a proportionate right of deduction due to mixed/combined use. This may, for example, apply to a lessee with a combined taxable and exempted use of the premises. The lessee will in such case in principle have the same proportionate deduction percentage before and after the coronavirus situation based on the mixed use. The question is then whether the Compensation Scheme will cover the lessee’s costs relating to the part of the VAT that is not deductible under the deduction provisions of the VAT Act?
Pursuant to the Regulations and the homepage of the Compensation Scheme, VAT that is deductible cannot be regarded as a fixed unavoidable cost. However, it is not stated that VAT which is not deductible cannot be regarded as a fixed unavoidable cost. We see no reasons why incurred non-deductible VAT should be kept outside the Compensation Scheme. VAT that is not deductible in accordance with a distribution formula of the lessee must therefore, in our opinion, be considered as a fixed unavoidable cost for which compensation can be claimed.