Withholding tax is a tax that is imposed as tax deduction (or withholding), i.e. that the payer of the interests or royalties deducts the tax from the payment. The payer is responsible for assessing the tax liability, making the appropriate tax deduction, and may be held liable for failed tax deductions to the Norwegian tax authorities. This entails that the withholding state imposes taxes on the recipient of the payment, in addition to the taxes imposed by the recipient’s state of residence. Withholding tax is usually implemented as a tax on the gross amount paid, i.e. no deduction is made for any costs related to the income.
The Ministry has not proposed any threshold for the application of the withholding tax.
The Ministry of Finance’s proposal to introduce withholding tax on interests and royalties was presented in a consultation paper of 27 February 2020. The proposal follows-up on the Scheel Committee’s proposal. The reason for the proposal of Norwegian withholding tax on interests and royalties is that the value created have arisen in Norway. Furthermore, the withholding tax is intended to prevent profit shifting from Norway to other states through artificially high interest and royalty payments to recipients that are related and tax resident outside of Norway. The rules should also prevent effective zero-taxation in cases where the income is not taxable for the recipient (or taxed very low).
The applicability of the withholding tax on interests and royalties is limited to payments from entities tax that has full or limited tax liability to Norway, to «related parties» tax resident outside of Norway. The payer and the recipient are «related parties» if there is a direct or indirect ownership or control between them, or joint ownership or control, of at least 50 per cent. The term related party is applied similarly in the existing interest deduction limitation rules.
Firstly, the withholding tax is applicable on royalty income. «Royalty» is described as consideration for the use of intellectual property rights. The Ministry believes there are good reasons why the withholding tax should also include leases of certain physical assets (drilling rigs, etc.). After receiving input from on the consultation paper, the Ministry will further consider whether such leases should be covered by the rules.
Secondly, the withholding tax will affect interest. In respect of interest, it is proposed that only withholding tax on interest payments to related parties resident in «low-tax countries» shall be included. The reason for this is that limitation on tax deductions on interest are already covered by the interest limitation rules. The term low-tax countries should be interpreted in the same manner as elsewhere in Norwegian tax law, i.e. if the effective tax rate in the state in which the recipient is resident for tax purposes is lower than 2/3 of the current tax rate in Norway on similar income, the state in which the recipient is tax resident should be deemed a low-tax country. The Ministry has previously proposed to raise the «low-tax country» threshold from 2/3 to 3/4 of the comparable Norwegian tax rate, and opened up to making a reassessment as to whether it is appropriate to maintain the current distinction between active and passive income in respect to the NOKUS rules. There are however currently no legislative proposals relating to this.
The rules regarding withholding tax on interests and royalties must not violate the European Economic Area («EEA») Agreement. At the same time, the Ministry wants Norway to fully utilise the scope provided by the EEA Agreement, i.e. that the withholding tax rules applies as broadly as the EEA Agreement permits. The Ministry proposes that recipients of interest and royalty payments that are genuinely established in an EEA state and conduct real economic activity there, may choose an alternative net taxation method to being levied a gross withholding tax on such payments governed by this rule. In the event the taxpayer elects the alternative net taxation method, the taxpayer must submit a tax return to Norway. The tax will then be calculated on the basis of the paid amount after deduction of the costs associated with the current lease or loan arrangement. In respect of intellectual property licences, this will entail that the recipient may claim tax deduction for costs associated with the licencing of the intangible asset used in Norway. Costs related to the development of licence products should however normally not be included, as this is usually considered ownership-costs and not operational costs.
The effectiveness of the proposed new rules on withholding tax on interests and royalties requires renegotiation of many tax treaties. In a number of the current treaties, the withholding tax rate is set lower than 15 per cent; inter alia at 0 per cent, 5 per cent, 10 per cent, and 12.5 per cent. The withholding tax will only have full effect in relation to recipients tax resident in states with which Norway does not have a tax treaty.
The Ministry will review the relationship between the proposed new rules with the NOKUS rules, in order to avoid double taxation. An alternative that is outlined by the Ministry is to give Norwegian taxpayers a deduction in fixed NOKUS tax for a proportionate share of any withholding tax paid.