Norway's Parliament passed legislative changes for the 2019 budget on December 20 2018, seeing notable changes to inbound investments, particularly a reduced corporate income tax (CIT) rate and stricter interest limitation rules (ILR).
Corporate income tax falls to 22%
The general CIT rate for the income year 2019 has been reduced from 23% to 22%. It will largely benefit most Norwegian industries, except for the financial industry and the energy and resources industry. This will also affect deferred tax assets and/or liabilities in the annual accounts.
Stricter interest limitation rules
Inspired by BEPS Action 4 report, Norway has extended the ambit of ILR. For companies considered a "group company", the ILR will now apply to interest expenses on all debt, not just interest on internal loans. For stand-alone companies (all companies not considered as a "group company"), only the interest cost on related-party debt may be limited. Under ILR, net interest expenses exceeding 25% of tax earnings before interest, tax, depreciation and amortisation (EBITDA) will be denied.
A group company is defined as a company that either:
- Has been consolidated line-by-line in the outgoing balance of consolidated group accounts (prepared according to Norwegian generally accepted accounting principles (NGAAP) or general accepted accounting principles (GAAP) in an EU or European Economic Area state, US or Japan, or International Financial Reporting Standards (IFRS) or IFRS SME, in the accounting year before the income year); or
- Would have been if IFRS had been applied (line-by-line consolidated).
- For a group company, the rules only apply if the net interest expense for all Norwegian companies within the group (consolidated) exceed NOK 25 million ($2.9 million). For stand-alone companies, the corresponding threshold is NOK 5 million.
However, as a starting point, the ILR will not apply for a group company demonstrating that the equity ratio (after several adjustments have been made) of either the company itself or the Norwegian part of the group is equal to or better than the consolidated equity ratio in the group accounts that the company was consolidated into (in the accounting year before the income year), i.e. not thinly-capitalised compared to the overall group (a 2% deviation from the group's equity ratio is accepted).
Adjustments to the domestic definition of tax residency
Norway has adopted a new definition of "tax residency" in domestic law from January 1 2019, which could ultimately lead to a change in the tax residency status for Norwegian and foreign limited companies, among others.
Under the new legislation, companies incorporated under Norwegian corporate law will always be regarded as a tax resident in Norway, unless they are regarded as a tax resident in another country (based on their domestic law and the tie-breaker rule in a tax treaty with Norway).
Moreover, foreign-registered corporations that have their effective management (and control) in Norway will be considered a tax resident in Norway. Effective management (and control) is not limited to the decisions at the board level (which was the main focus under previous rule), but also the day-to-day management, where the directors of the board/management reside and have their daily work (and "other circumstances based on the company's organisation and business".) An example of "other circumstances" would be the place of the shareholder meetings.
The rule could lead to the challenging of the tax residency status for non-Norwegian companies owned by Norwegian groups, as well as Norwegian companies owned by foreign groups where management takes place outside Norway.