The withholding tax proposal raises questions relating to the extent of the withholding tax liability (in connection with payments to related enterprises in low-tax countries), and the relationship of such tax with EEA law and Norway’s taxation rights under the various tax treaties.

In this newsletter, we will discuss the main elements of the proposal from the Ministry.

The purpose of the withholding tax

According to the Ministry of Finance, the main purpose of the proposal is to counteract profit shifting from Norway in connection with the payment of artificially high interest, royalty and lease payments from Norwegian enterprises to closely related enterprises in low-tax countries. The withholding tax will also serve to counteract zero-rate tax (or low tax) on interest and royalties etc. for the recipients. Thus, the withholding tax will counteract the use of Norway as a conduit country for such payments.

Gross income tax without the entitlement of cost deduction – “stop rule” for rig companies etc. in low-tax countries

The proposed withholding tax is a tax on gross income (just like withholding tax on other types of income). This implies that no cost deduction is granted in respect of the income subject to withholding tax. Thus, the recipient of the payment is liable to pay withholding tax even if its business operates at a loss. This can particularly affect payments for tangible assets, such as ships, rigs, planes etc., as it is not unusual for such businesses occasionally to operate at a loss. The Ministry acknowledges that withholding tax at a rate of 15% on lease payments for tangible assets is a strict measure, which might imply a negative return after tax in certain cases, as has also been indicated by several commentators on the 2020 winter proposal. The Ministry justifies this aspect of the proposal by referring to the fact that the purpose of introducing such a measure is to counteract tax planning through the establishment of ownership structures in low-tax countries and to limit the possibility of shifting profits out of Norway. Such investments in low-tax jurisdictions may be made instead of investments in Norway and give strong incentives to carry out intra-group profit transfers. The Ministry makes the assumption that withholding tax at a rate of 15 % on rig leases etc. is likely to act as a “stop rule”, and that the enterprises as a result of the withholding tax will have to restructure to adapt to new conditions.

Withholding tax on interest

The limitation of payments to related enterprises in low-tax countries

Since the main purpose of introducing withholding tax is to counteract profit shifting, the Ministry proposes that the withholding tax liability should be limited to interest payments to related enterprises in low-tax countries. The rationale behind this is to target the withholding tax liability to payments where the risk of profit shifting is high.

The Ministry proposes that the definition of “related parties” in the withholding tax rules should be equal to the definition in the interest limitation rules and transfer pricing documentation rules. The Ministry proposes that “related” should be defined as direct or indirect ownership or control by at least 50 %. The actual assessment as to whether parties are related or not should take place continuously throughout the income year until the taxable payment is taxable.

The Ministry states that the identification of payments to recipients resident in “low-tax countries” must be performed according to the same method as otherwise provided in the Tax Act, i.e. on the basis of the definition of low-tax countries in the Tax Act, section 10-63. Countries in which the general income tax on the total profits of companies or entities constitutes less than two-thirds of the tax that would have been levied on those same companies or entities had they been resident in Norway, are considered as low-tax countries.

The interest definition

The Ministry proposes that the general interest definition in Norwegian tax law should apply correspondingly for the withholding tax on interest. The Ministry emphasises that the interest definition should correspond to the general concept of interest under tax law with regard to financial leasing. This implies that withholding tax will only be levied if the interest element in a leasing payment qualifies as interest for tax purposes.

The relationship with the interest limitation rule

Whether or not a Norwegian withholding tax on interest should be limited to cases in which the interest payment is deductible for the Norwegian debtor, has previously been a topic of discussion. The reason for this dilemma is the fact that the debtors’ right to make deductions may in whole or in part be limited pursuant to the interest limitation rule in section 6-41 of the Tax Act.

Referring to the fact that taxation of the recipient of the interest payment (i.e. the foreign creditor) should not depend on the tax treatment of the interest payer (i.e. the Norwegian debtor), the Ministry proposes that withholding tax on interest should be levied irrespective of whether the interest payer has a right to deduct the interest or whether the right to deduct the interest is limited by the interest limitation rules.

Withholding tax on royalties and lease payments for certain types of tangible assets

Limitation to payments to related enterprises in low-tax countries

In just the same way as for the withholding tax on interest, the Ministry proposes that withholding tax on royalties and certain types of lease payments should be limited to payments to related enterprises resident in “low-tax countries”. This is an amendment which has been made since the consultation paper from winter 2020 was written; the consultation paper did not contain a proposal stating that the withholding tax liability in respect of royalties and certain types of lease payments should be limited to payments to enterprises in low-tax countries (only to related companies). Thus, this was changed after the consultative round, on the basis of the comments received from the tax community.

What kind of payments are covered by the proposal?

The royalty definition

The Ministry acknowledges that the concept of “royalty” does not have a clearly defined meaning in Norwegian tax law. However, the Ministry states that the concept of royalty in the withholding tax rule is intended to coincide with the meaning of the same concept in section 5-20, first paragraph, litra c of the Tax Act, “intellectual property rights (copyrights and patent rights etc.)”. However, the problem is that section 5-20, first paragraph, litra c of the Tax Act also does not define the concept of “royalty” very clearly.

As the definition of what constitutes “intellectual property rights” within the meaning of the Tax Act is somewhat unclear (e.g. whether inclusion in the concept is conditional on copyright protection or not), the Ministry states that there may be a need to provide further guidance as to the type of payments to be covered by the concept of royalty. Such further guidance will probably be provided either by including a definition in the Tax Act or in the form of regulations to the Tax Act. In the proposal, the Ministry signals that a potential definition of royalty in the law can be drawn up on the basis of the definition of royalty in Article 12 of the OECD Model Tax Convention.

Lease payments for certain types of tangible assets

The Ministry proposes that the withholding tax liability in respect of lease payments for certain types of tangible assets should include lease payments for ships, vessels, rigs, planes, helicopters etc. These are assets included in the deprecation asset group in section 14-41, litras e and f of the Tax Act. In the Ministry’s view, it is relatively clear, based on established practice, which types of assets are covered by these provisions.

Lease payments in connection with the leasing of vessels etc., which seen in isolation may be regarded as lease payments for certain types of tangible assets, may in some cases also be classified as interest for tax purposes. In such cases, this part of the lease payments will be covered by the withholding tax on interest payments.

Which taxpayer is liable to pay the withholding tax?

The withholding tax on interest, royalties and certain types of lease payment, shall be paid by the company or entity receiving the payment from the closely related Norwegian enterprise. The withholding tax liability shall only apply to companies and other non-personal taxpayers, i.e. payments to personal taxpayers (individuals) resident abroad will not be covered by the withholding tax liability.

For payments to foreign partnerships, the deciding factor, according to the Ministry’s proposal, will be if the individual participant in the company fulfils the criteria for withholding tax liability or not. This means, for example, that interest, royalty or certain types of lease payments paid to a partnership and established in a normal-tax country, where one or more of the participants are closely related enterprises resident in low-tax countries, will be liable to withholding tax on the proportionate share of the payment which may be allocated to the participants resident in low-tax countries for tax purposes.

When is Norway regarded as the source state of the payment?

According to the Ministry’s proposal, the withholding tax will generally apply to interest, royalty and certain types of lease payments received by the recipient companies from closely related “Norwegian companies”. The limitation to “companies” implies that payments from personal taxpayers resident in Norway will not be subject to withholding tax.

For payments from Norwegian companies which are assessed as partnerships pursuant to the Tax Act, sections 10-40 et seq., or corresponding foreign partnerships with participants liable to tax in Norway, withholding tax will be levied on a share of the payment corresponding to the ownership shares in the company held by the participants with tax liability to Norway. The proportionate share of the payment to be subject to withholding tax, will be calculated using the corresponding ratio as for the distribution of net profits in connection with taxation according to the net method of the Tax Act, sections 10-40 et seq.

Adaptation to EEA law

The withholding tax must be designed in such a way that it does not conflict with Norway’s obligations under the EEA Agreement. In order to ensure this, the Ministry originally proposed that payment recipients genuinely established within the EEA are should be given the choice between gross-income withholding tax and taxation pursuant to the net taxation method (on a par with payment recipients resident in Norway). The Ministry has now abandoned this approach. Instead, the Ministry proposes that a general exemption should be granted from the withholding tax liability in respect of payments to recipients genuinely established and operating real business activities in an EEA country. Pursuant to the Ministry’s proposal, identical documentation requirements as the one applying to the treatment of genuinely established EEA companies under the participation exemption method and CFC rules must be fulfilled in order for the exemption to become applicable:

Either the recipient itself must document that it is genuinely established and operates real business activities in an EEA country. This rule applies if Norway can request the recipient’s country of establishment for information under an exchange of information clause contained in a tax treaty or international convention.
Or the recipient must, additionally, present a declaration from the tax authorities in its country of establishment that confirms the that recipient’s information is indeed correct and accurate. This rule applies if Norway cannot request the recipient’s country of establishment for information under an exchange of information clause contained in a tax treaty or international convention.

The relationship with Norway’s tax treaties

In tax treaties between Norway and other countries, Norway’s right to impose withholding tax on interest, royalties etc. may be limited in whole or in part. The question as to whether Norway may impose withholding tax on payments to closely related enterprises in low-tax countries when there is a tax treaty in place between Norway and the recipient’s country of residence, will depend on an interpretation of the individual treaty, as there may be in part very large differences between the tax treaties.

Since Norway has traditionally not imposed withholding tax on interest and royalties, reserving the right to impose withholding tax on such types of income has not previously been of great importance to Norway, and, hence, the entitlement to do so has been waived in many Norwegian tax treaties. In introducing a statutory basis in domestic law for withholding tax on such payments, Norway can now be expected to alter its strategy in tax treaty negotiations and from now on attempt to a greater degree to reserve the right to levy withholding tax on such payments.

No threshold amount for the withholding tax liability

The Ministry considers that the introduction of a threshold amount will give rise to avoidance-arrangements, and cause considerable administrative work both to the taxpayers liable to withhold tax and to the tax authorities. The Ministry therefore does not proposes to introduce a threshold amount at which withholding tax is triggered. This implies, in practice, that the withholding tax becomes applicable regardless of the amounts paid.

Assessment and payment of withholding tax

The Ministry’s proposal implies that it is the company paying interest, royalty etc. which must withhold the withholding tax from the amount paid to the recipient. The entity liable to withhold tax (i.e. the company making the payment) must send a statement to the tax authorities for each individual assessment of tax. It is not a requirement that the withheld amounts should be kept in a separate tax withholding account.

The way ahead

As already mentioned, the withholding tax is proposes to enter into force in summer 2021. Before then, multinational groups receiving relevant payments from Norwegian group companies should carefully consider the implications of the new rules, and whether payments structures and commercial arrangements should be changed. This is particularly acute if the recipient of the payments from Norway is established in a low-tax country outside of the European Economic Area.

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