7 October 2015, the Norwegian government presented the fiscal budget for 2016 including proposed amendments to the tax law with effect from 2016. The same day the government also presented a white paper containing proposals for a minor tax reform to be introduced before the end of 2018.
Tax proposals in the fiscal budget for 2016
Although the Government does not have the majority of the votes in the parliament (Stortinget), it is expected that the proposals will be approved before year-end. In such case, the proposed rules will be applicable from 1 January 2016.
The main features relevant for corporate tax in the fiscal budget are:
Reduction of corporate tax rate
The general income tax rate is reduced from 27% to 25%. This reduction will affect both corporate taxpayers as well as individual taxpayers.
The reduction aims at being an incentive to business activities only. Therefore, individual taxpayers will suffer additional tax on dividends and capital gains from shares. A new “step-tax” will be introduced on salaries.
Enterprises engaged in the Norwegian petroleum exploration and production industry and hydro power plant suffer an additional tax. This taxis increased with 2 % so that the tax level remains the same as today – i.e. maximum tax remains at 78 % for E&P companies.
Interest deduction limitation rules
The interest deduction limitation rules introduced in 2014 will be amended. These rules are applicable only when intra group interest expenses exceed NOK 5 million, which in general implies that the intra group debt should exceed at least NOK 50 million.
The proposal is that net interest paid to related parties would not be deductible to the extent the total net interest expense exceeds 25% (currently 30%) of earnings before interest, taxes, depreciation and amortization (EBITDA).
Fighting the use of hybrid instruments
In accordance with the OECD’s base erosion and profit shifting (BEPS) project it is proposed that the application of the participation exemption regime with regards to dividends received by a Norwegian company will no longer apply to the extent that the distribution has been tax deductible at the level of the distributing entity.
Income from securities funds
For tax purposes, a securities fund is deemed either as a “share fund” or as a “bond fund”. A fund is regarded as a share fund if it has invested in one or more shares. Distributions or gains from a share fund to corporate investors are subject to the exemption method whereas distributions or gains from bond funds are subject to regular corporate tax.
The exemption method will be amended so that exemption will reflect the underlying investment of the fund, i.e.:
- Full exemption if more than 80 % of fund investments are shares
- Full tax liability if less than 20 % of fund investments are shares
Proportional split between tax exempted and tax liable income if fund investments in shares are between 20 % and 80 %.
Subsidy of R&D activities
Research and development (R&D) is in Norway subsidized via the tax declaration, so called “Skattefunn”. The subsidy is available for both in-house R&D and procured R&D. In order to benefit from the incentive, the R&D project must be approved up front.
It is proposed that the current R&D expense limitation of NOK 15 million increases to NOK 20 million for in-house R&D, while the cap for procured R&D increases from NOK 33 million to NOK 40 million. If the taxpayer has both procured R&D from an approved research institution and carries out its own R&D activities, the total cap will be set at NOK40 million, whereby in-house R&D cannot exceed NOK 20 million.
Note that the subsidy is 20 % (SME) or 18 % (larger enterprises) of the R&D expenses.
It is proposed that acquisition costs should be non-deductible in the event the acquisition is not carried out.
It is proposed that, with effect from 7 October 2015, new loans from a limited liability company to an individual shareholder should be regarded as taxable dividends.
Tax proposals in the white paper
Complete proposals will be drafted based on the outcome of the discussion in the parliament. Some rules may be implemented in 2017 and some in 2018
The major proposals are in short:
The corporate income tax rate will be reduced to 22% by 2018.
Norway will introduce withholding taxes on interest
Norway will introduce withholding tax on royalties, and certain forms of asset leases
Currently the Norwegian general anti-avoidance rules (GAAR) are based on Supreme Court decisions. The basic rule is that transactions that are undertaken with little or no other purpose than avoiding tax, under certain circumstances, may be disregarded for tax purposes. It is proposed to codify these rules in the tax law.
Under the current domestic law, a company is considered to be a tax resident in Norway based on an assessment where the key element has been whether the company is effectively managed from Norway or not. It is proposed to include provisions stating that all companies incorporated in Norway always must be considered a tax resident in Norway for domestic law purposes.
Norway may implement country-by-country reporting into Norwegian domestic law. The first reporting should be done in 2018 based on figures for 2016.
Amendments or simplifications to the controlled foreign corporation (CFC) rules will be considered.
Indirect taxes within the finance sector, including value added tax (VAT) on various charges and fees, may be expected in the 2017 Fiscal Budget.
Tax depreciation rates
Tax depreciation of assets and acquired goodwill are based on an annual declining balance method. From 2017, it is expected that the depreciation rates for certain assets will be decreased as follows:
- Vessels, drilling rigs, etc.: current rate of depreciation of 14% to be reduced to 10%
- Hotels, restaurants, etc.: current rate of depreciation of 4% to be reduced to 2%