Norwegian Court of Appeal follows EFTA Court’s lead on the interest deduction limitation rule
Daniel M H Herde and Lene Bergersen of Deloitte Norway explain the Court of Appeal judgment in PRA Group Europe AS v Staten v/Skatteetaten. The team acted as legal counsel for the taxpayer in the court proceedings.
This is an update on the case reported on in a previous article by Deloitte Norway regarding the EFTA Court judgment in PRA Group Europe AS v Staten v/Skatteetaten (E-3/21). As stated in that article, the EFTA Court ruled against Norway, determining that the interest deduction limitation rule in force from 2014 to 2019 was contrary to the freedom of establishment. It was also stated that the Norwegian courts are not obliged to follow the EFTA Court ruling, but that they normally do.
For more information about the facts and relevant Norwegian law, please refer to the previous article.
Judgment by the Oslo District Court and appeal
Following the judgment by the EFTA Court, the case continued before the Oslo District Court, which found that the Norwegian interest deduction limitation rule was not contrary to European Economic Area (EEA) law. Mostly due to the similarities between the Norwegian rule and Article 4 in the EU Anti-Tax Avoidance Directive (ATAD), the court found that the difference in treatment could be justified by the need to safeguard a balancing allocation of taxing rights and the need to prevent tax avoidance.
The taxpayer appealed the case to the Borgarting Court of Appeal (the Court of Appeal).
Key takeaways from the Court of Appeal judgment
The first question the court had to answer was whether the interest limitation rules, in combination with the group contribution rules, caused a restriction on the freedom of establishment. The parties agreed that the tax rules created a restriction but disagreed on whether it was the group contribution rules or these rules in combination with the interest deduction limitation rule that created it. What caused the restriction would be the governing factor for which overriding reasons in the public interest could justify the restriction.
The Court of Appeal agreed with the taxpayer and the EFTA Court and found that it was the combination of the interest limitation rules and the group contribution rules that created the restriction, and not merely the group contribution rules.
Following the judgment by the EFTA Court, the parties agreed that the cross-border situation was objectively comparable with the national situation. Thus, the second question the court had to answer was whether the restriction could be justified by overriding reasons in the public interest. Since the Norwegian interest deduction limitation rule only concerned the taxation in one EEA state – i.e., Norwegian taxation of the Norwegian debtor – the need to safeguard the balancing allocation of taxing rights could not justify the restriction. This is because in a situation where one member state grants a deduction in the national situation, it cannot at the same time argue that the taxing right is important in the cross-border situation. Nor could the need to prevent tax avoidance justify the restriction, as the rule applied to all loans and not only purely artificial arrangements set up to avoid national taxation. Since the restriction could not be justified by overriding reasons in the public interest, it was not necessary for the court to assess the requirements for necessity and proportionality.
A separate question was whether the ATAD could change the assessment of justification. The EFTA Court had rejected this by stating that the directive was not EEA-relevant and had not entered into force in the EU at the time in question. As mentioned, the Oslo District Court, however, saw it differently.
The Court of Appeal agreed with the EFTA Court and found that the ATAD did not change the assessment of justification. In addition to the points mentioned by the EFTA Court, the Court of Appeal, among others, found that since the extension of the interest limitation rule to groups was voluntarily under the ATAD, the addition would have to be implemented in line with the four freedoms. The court also found that the directive itself could have an uncertain side towards the four freedoms.
On this basis, the Court of Appeal concluded that the Norwegian interest deduction limitation rule was in breach of the freedom of establishment under the EEA Agreement.
As a consequence of the EEA breach, the court concluded that the decision from the Tax Appeal Board had the wrong legal basis and was nullified. The Court of Appeal did not set guidelines for the further processing of the case, which will be sent back to the tax administration for an assessment of the deduction right in light of the EEA breach. This is unless the case is appealed and admitted to the Supreme Court, where it might have a different outcome. Since this is a pilot case, the chances are good that the state will appeal the decision.
If a final and enforceable judgment on the EEA breach is reached, other taxpayers that have been denied interest deductions in the relevant years (2014–19) may request a reassessment. Furthermore, the EEA breach is, in the authors’ view, also relevant for the current rules; under which, group contributions can still be used to reduce interest limitation.