Ingunn Mollnes

Norway's Ministry of Finance released a consultation paper on April 11 2013 that would introduce limits on the deduction of interest on related-party debt. The purpose of the proposal is to restrict earnings stripping via intercompany debt financing. Under the proposal, net interest expense paid to a related party would not be deductible in a year to the extent such expense exceeds 25% of a basis of limitation, a figure similar to EBITDA. The limitation would be calculated separately for each entity. However, the limitation only applies to companies that have net interest costs exceeding NOK1 million ($170,000). The proposal suggests that the rules would apply as from fiscal year 2014.

Related parties

The term "related-parties" covers both direct and indirect ownership and/or control. The minimum ownership/control requirement is 50%. The proposal is not only limited to cross-border loan arrangements and will also include loans between Norwegian taxpayers. Back-to-back loans via an independent lender would also be caught by the rules.

The proposed rule is not intended to limit the right to deduct interest on loans obtained from unrelated lenders such as banks and financial institutions; however, interest paid to unrelated lenders is included when calculating the interest deduction limit.

Basis for limitation

The basis for the 25% limitation would be the net taxable profit, before taking into account interest earned by the corporation, interest accrued on debt taken out by the corporation and tax depreciation.

Net interest expense

"Net interest expense" would be defined as interest accrued on debt less interest earned. Gains or losses on certain bonds would be treated as interest earnings or interest accrued on debt. Currency gains/losses are, however, not included. Neither are gains/losses on interest and currency derivatives. Although interest paid to both related and unrelated parties would be included in calculating the 25% limitation, the amount disallowed would be limited to net interest expense paid to related parties.

For example:

Interest deduction will be limited to the 100, however, interest on external debt will always be deductible – so 120 will be deductible, while the total of interest paid to related party will not be deductible.

Carry-forward of non-deducted intra-group interest and taxation of interest income

Any related party interest payments which are not deductible because of limitation may be carried forward for a maximum of five years. Interest received is taxable income for the creditor even if the debtor has been denied deductions due to the limitation.

Ingunn Mollnes (imollnes@deloitte.no)

Deloitte, Norway

Tel: +47 51 81 56 57

Website: www.deloitte.no