Proposed changes to the Norwegian interest deduction limitation rules
Rebecca Hammer of Deloitte Norway highlights the proposed changes to the Norwegian interest deduction limitation rules published in a consultation paper by the Ministry of Finance on April 12th 2023, effective from 2024.
As of today, the definition of financial lease for accounting purposes is, in certain situations, wider than the definition of financial lease for tax purposes. Consequently, not all financial lease payments have been considered as interest under the Norwegian interest deduction limitation rules.
The Ministry of Finance now proposes that the accounting definition shall override the tax definition. Hence, when calculating net interest expenses for interest deduction limitation purposes, the finance cost element related to financial leasing shall be the same amount as set out in the company’s annual accounts prepared in accordance with the Norwegian Accounting Standard (Norsk RegnskapsStandard) 14 (NRS 14). If no finance cost element has been recognised in the financial statements, the company would have to assess whether the calculation of the interest element is in line with the principles in NRS 14. In the event of different treatment, the company may have to keep a "shadow accounting" determining the finance cost element in line with NRS 14.
For taxpayers with a financial lease, the proposed change may lead to increased net interest expenses being denied deduction for tax purposes or the taxpayer having to decide to limit the interest deduction. The proposal will also lead to increased compliance costs for taxpayers.
Special limitation rule for interest expenses to related parties
The Norwegian interest deduction limitation rules contains a specific limitation on net interest expenses to related parties that fall outside the definition of the same “group” under the interest deduction limitation rules.
It has been possible to circumvent this rule by incorporating an intermediary Norwegian holding company and using back-to-back shareholder loans. By doing so, the Norwegian holding company with interest expenses to a related party outside the group, would have zero in net interest expenses, and thus not have any net interest expenses subject to the special interest limitation rule.
The Ministry of Finance now suggests introducing a special anti-avoidance rule tracing the interest payment as if the interest payment was paid directly to a related party outside of the group.
Group contributions and calculation of the interest deduction cap
Under the current rule, group contributions received from a company that applies the equity escape rules shall not be included when calculating the interest deduction cap (25% of taxable EBITDA). The Ministry of Finance states in the proposal that the current rules may be circumvented by transferring group contributions via a third company that does not use the exemption rule.
The Ministry of Finance proposes that group contributions via a third company may be traced back as if received directly from a company applying the equity escape rules. It is also proposed that group contributions from financial institutions and companies falling within the scope of the Petroleum Taxation Act that are exempt from scope of the interest deduction limitation rules, are not to be included in the calculation of the interest deduction cap.
The proposed changes will add further complexity to the Norwegian interest deduction limitation rules, which are already complicated. The Ministry of Finance has estimated that the proposed change to the definition of financial leasing will have a tax revenue effect of about NOK 30 million. When weighing the limited tax revenue effect up against the increased complexity of the rules, one may question whether the proposed change is necessary.
The second proposal will stop certain interest deduction limitation planning, however the proposal will at the same time also impact wholly-owned Norwegian structures with commercially driven financing structures. The proposal goes therefore broader than the purpose behind the rules, which is to limit base erosion within multinational groups by placing a higher level of debt in high tax jurisdictions.
Regarding the third proposal, it may also be questioned how widespread the problem with group contributions indirectly originating from companies that have invoked the equity exemption rule is in practice.