Income taxes are assessed on companies individually, not on a consolidated basis. This may be avoided through group contributions between Norwegian companies, provided common direct or indirect (including foreign) ownership and voting rights is more than 90%. Furthermore, the Norwegian group contribution rules are, under certain conditions, also applicable to Norwegian branches of foreign companies that are resident within the EEA. Note that group contributions are not deductible for companies engaged in oil and gas producing activities subject to the Petroleum Tax Act.
Assets may, pursuant to the Group Regulations, be transferred tax-free between group companies at tax book value for tax purposes and at market value for financial book purposes. However, a guarantee for the latent tax liability created by the transfer must be provided upon request by the tax authorities.
Payment must equal market value of the assets transferred. The same applies to payment in the form of shares. If the transferee loses the affiliation with the tax group while still owning the transferred assets, the transferor will be taxed for the difference between the tax book value and the market value of the assets.
In Norway, the arm’s-length principle for related party transactions is incorporated into the Tax Act. The transfer pricing provision of the Tax Act states that the OECD Guidelines 'shall be taken into account' when addressing transfer pricing issues under Norwegian tax law.
Transfer pricing has increasingly become the focus of the tax authorities’ attention in recent years. It is fairly common for the Norwegian tax authorities to choose test cases that are subject to substantial investment. During the most recent years, focus has been on business restructuring, commissionaire arrangements, and the financing of operations.
Norway has newly introduced an advance pricing agreement (APA) regime. It is also becoming more common to discuss complex cases with the tax authorities on a non-binding basis in advance of implementation or before assessment. However, there are no particular Norwegian safe harbour rules or any other official guidance of how to price specific transactions, etc.
There is no fixed debt-to-equity ratio requirement in Norwegian tax law. However, for companies that are part of a group, adjustments may be made under the arm’s-length provisions. Generally, these provisions apply only if the company has obtained a larger loan from a group company than an independent credit institution would have granted, or if the agreed level of interest is higher than an independent credit institution would have required. Naturally, this analysis will vary based on the actual company’s credit worthiness, which consists of several elements, such as the nature of the business, financial status, future income possibilities, and group relationships. As such, there is no applicable 'safe harbour'. The company must also be able to service its debts.
If a Norwegian entity is regarded as being thinly capitalised, part of the entity’s interest and debts may be reclassified to dividend and equity.
Limitations apply to tax deductible inter-company interest expenses. In general, interest expenses to related parties that exceed 25% of a Norwegian company’s taxable earnings before interest, taxes, depreciation, and amortisation (EBITDA), with some adjustments, will not be tax deductible. The regulations only apply to companies that have more than NOK 5 million in total net interest expenses.
Two parties are related if one party directly or indirectly owns or controls the other party by at least 50%. Related parties may be resident in Norway or abroad.
External loans can also, under certain conditions, be regarded as intra-group loans if an entity has provided a guarantee for the debt of a related party. However, an exemption applies if the guarantee is provided by a company that is more than 50% owned by the borrower or a company that is controlled by the borrower or if the security is the shares in the borrower.
The interest deductibility limitation is calculated for each entity in the group. Disallowed interest deductions may be carried forward for ten years.
The limitation applies both to local and foreign companies that have a taxable presence in Norway, as well as partnerships, CFCs, etc.
The European Free Trade Association (EFTA) Surveillance Authority has issued a reasoned opinion stating that the Norwegian interest limitation rules might violate Norway’s obligations under the EEA Agreement. The outcome of the investigation and effect for previous and future years is still pending.
Controlled foreign companies (CFCs)
Norwegian residents are taxed directly on their allocable part of the profits from a CFC’s income if the company is resident in a low-tax country, irrespective of whether income is distributed to the Norwegian investor. A low-tax country, in this respect, is a country where the effective foreign income taxation of the company’s profits is less than two-thirds of the effective taxation that would have been due had the company been resident in Norway. A condition for such taxation is that 50% or more of the foreign company’s shares or capital is held or controlled, directly or indirectly, by Norwegian taxpayers (alone or together), based on the status at the beginning and end of the income year in question.
Note that if Norwegian taxpayers own or control more than 60% of the shares or capital at the end of the income year, Norwegian control exists irrespective of the level of control at the beginning of the year. Norwegian control ceases to exist if Norwegian taxpayers own or control less than 50% of the shares or capital at both the beginning and end of the income year or less than 40% of the shares or capital at the end of the income year.
On the condition that Norway has signed a tax treaty with the country involved and the company in question is covered by the treaty, the CFC rules will be applicable only if the income of the entity in question is mainly of a passive nature. Furthermore, CFC taxation may also be prohibited if the company in question is resident within the EEA and cannot be deemed as a wholly artificial arrangement as outlined in the ECJ’s decision in the Cadbury Schweppes case. Hence, CFC taxation will be avoided for EEA companies that fulfil certain substance requirements.