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Daniel Herde |
Trond Eivind Johnsen |
The Norwegian Ministry of Finance (MoF) has proposed changes to the interest limitation rules applying to group companies, possibly limiting the interest deductions for MNEs' inbound investments in Norway.
The proposal is open to public consultation. Unless a de minimis threshold, or one of two group equity ratio tests, are met, the MoF proposes that deduction for all interest expenses that exceed 25% of "taxable EBITDA" should be denied.
While the current interest limitation rules only limit interest expenses on intragroup debt and certain guaranteed external debt, the proposed rules will affect all external debt in addition to intragroup debt. The new rules will apply to all group companies in Norway if the Norwegian part of the group has net interest expenses exceeding NOK 10 million ($1.2 million) (compared to a de minimis threshold of NOK 5 million per entity under the current rules).
Norwegian companies forming part of an MNE may, however, escape interest limitation if they meet one of two equity ratio tests:
1) If the equity ratio of the company in question is equal to or higher than the equity ratio of the consolidated group (i.e. the company is not thin-capitalised), that company is fully exempt from interest limitation; or
2) If the equity ratio of the Norwegian part of the group is equal to or higher than the equity ratio of the consolidated group, all Norwegian group companies and entities are fully exempt from interest limitation.
Determining the comparable equity ratios require certain amendments to the company's annual accounts or consolidated annual accounts for the Norwegian part of the group. This includes:
Ensuring that differences in accounting principles are properly adjusted for;
Attributing goodwill/badwill, etc. from the group annual accounts to the group company that created the value; and
Ensuring that equity and debt that flow through intragroup companies is only accounted for (once) in the company where the equity/debt is actually used to invest in capital goods.
As a result, one has to disregard shares in group companies and intragroup receivables (asset in the balance sheet) and reduce equity and debt respectively (equity and liabilities in the balance sheet).
The essence of the equity tests is that Norway will not allow a higher leverage on Norwegian investments compared to the leverage of the MNE as such, using the group leverage as an "arm's-length comparable". While the aim is to prevent the use of debt for cross-border profit shifting, the rules may have an adverse impact on largely equity funded MNEs interested in capital-intensive investments in Norway, as the banks may require local debt and the assets as pledge (e.g. property investments or infrastructure). Equally, MNEs acquiring highly leveraged ongoing businesses in Norway may soon be required to push debt out of Norway to avoid the limitations.
On the other hand, for MNEs having only one Norwegian group company, the proposed changes could be good news, as the proposal is to increase the de minimis threshold for applying the rules from NOK 5 million to NOK 10 million in net interest expenses.
Claiming exemption under the equity ratio tests will require substantive documentation and an increased compliance burden on MNEs. Additionally, the proposed rules will not accept group accounts prepared in any other accounting standard than NGAAP, EU/EEA GAAP or IFRS. Consequently, MNEs with consolidated accounts in other GAAPs (e.g. US GAAP) will not have access to the equity ratio exemptions unless they prepare additional consolidated group accounts under IFRS, NGAAP or GAAP in an EEA country.
The proposal, which raises several other technical and other issues, if adopted, is expected to enter into force for the 2018 income year.
Daniel Herde (dherde@deloitte.no) and Trond Eivind Johnsen (tjohnsen@deloitte.no)
Deloitte Norway
Tel: +47 482 21 973 and +47 901 94 496
Website: www.deloitte.no
