The Norwegian Government Proposed Changes To The Rules On Interest Limitation And Corporate Tax Residency

The Norwegian Government presented its proposal for the 2019 state budget on October 8, which includes the proposal to change the rules on interest limitation and corporate tax residency.

Corporate Tax Residence

Under the proposal, the government initiates that companies incorporated in Norway and foreign companies performing effective management in Norway will be deemed as resident in Norway and liable to pay tax on their worldwide income. However, a company resident in another state under a tax treaty will not be deemed as a resident in Norway. The purpose of the change is to ensure that only a company that has a sufficient economic connection to Norway is deemed as a tax resident to avoid tax avoidance.

Interest Limitation

Under the current tax legislation, the interest limitation that applies to the deduction only applies to related parties’ transaction. The deduction is capped if net interest exceeds 25 percent of taxable earnings before interest, taxes, depreciation and amortization (EBITDA), and if net interest exceeds a de minimis threshold of NOK 5 million.

Relating to the current regulation, the following changes are proposed by the government:

  • Extended scope to cover interest on external loans in addition to internal loans. The amendment will only apply to companies in a group;
  • An increased de minimis threshold from NOK 5 million to NOK 25 million;
  • Provide an escape clause to keep ordinary business loans that are not part of a profit shifting strategy from being affected by the limitation. The escape clause will allow full deduction of interest paid to independent parties if the equity ratio of the company equals or exceeds the equity ratio in the group’s consolidated financial statements.

Source: Norwegian Government

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