US regulated investment companies (RICs) are as a starting point subject to 25% withholding tax on dividends received from Norwegian limited companies.
In a short period, US RICs were granted a refund of 10% of the withholding tax pursuant to the US–Norway tax treaty. The tax authorities later reconsidered this position based on an interpretive statement from the Ministry of Finance (MoF).
A new decision from the Tax Appeal Board disregarded the reasoning in MoF’s statement, but refused the US RIC’s refund claim on another basis.
Reasoning in the decision from the Tax Appeal Board
A US RIC may qualify for reduced withholding tax under the US–Norway tax treaty if:
It is a US corporation or treated as a US corporation for tax purposes;
It is regarded as the beneficial owner of the dividends; and
Article 20 of the tax treaty is not applicable.
The US RIC had provided a Form 6166 demonstrating that the first condition was met. Even though the US Norway tax treaty does not a have a beneficial owner requirement, the Norwegian view is that this condition can be interpreted in older tax treaties without a beneficial owner requirement.
In the MoF statement, the MoF concluded that US RICs cannot be the beneficial owner of the dividends received, partly because there is an obligation to redistribute the dividends and partly because it is the investors that are taxed for the income received. The second reason could imply that the MoF did regard the US RICs as being tax transparent.
The Tax Appeal Board stated that the MoF’s reason for disregarding the US RIC as the beneficial owner was incorrect, as a US RIC would become taxable for the part of its taxable income that is not distributed to its investors.
Newer commentaries to the OECD Model Tax Convention (2014) made a distinction between an obligation to redistribute an investment fund’s profits (a common feature for distributing investment funds) and an obligation to redistribute received dividends.
The latter obligation would not meet the beneficial ownership requirement, but the former obligation could meet the requirement. The Tax Appeal Board pointed to that Norway had not objected to the new commentaries, and therefore implicitly had accepted the distinction.
Since the US RIC did not have an obligation to distribute the received dividends but had a discretionary competence to determine the distribution to its owners, the US RIC fulfilled the beneficial ownership requirement.
The third question before the Tax Appeal Board was whether the limitation of benefits provision in the tax treaty limited the treaty benefits of the US RIC.
The US–Norway tax treaty has an older version of a limitation of benefits provision in Article 20, limiting tax treaty protection for US companies that for certain types of income/gains are:
Subject to a tax that is substantially less than the tax normally imposed on corporate income; and
25% or more of the company is owned, directly or indirectly, by persons who are not individuals resident in the US.
The Tax Appeal Board concluded that both requirements were met, so that the US RIC failed the last of the three abovementioned requirements for obtaining treaty protection.
Good news for US RICs with private American investors
For US RICs that have only American investors or only a few foreign investors, the abovementioned decision is good news.
It is expected that the tax office will follow this decision in other cases, but it cannot be guaranteed. US RICs that fulfil the conditions above may file a refund application going five years back.
Daniel Herde
Partner, Deloitte
