Income taxes are assessed on companies individually, not on a consolidated basis. Group relief is secured by the possibility of group contributions between Norwegian companies, provided common group 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 Transfer Pricing 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, inter alia, business restructuring, services, cost contribution arrangements, and the financing of operations.
Norway does not have a general, unilateral advance pricing agreement (APA) regime. Bilateral and multilateral APAs are available under the relevant DTTs. 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 on how to price specific transactions, etc.
Country-by-country (CbC) reporting
Norway has implemented CbC reporting rules for multinational groups with an overall income of NOK 6.5 billion or more. The report is to be submitted, at the latest, by 31 December of the year after the relevant accounting year. For multinational groups with divergent accounting years, the deadline is 12 months after the end of the accounting year.
There is no general fixed debt-to-equity ratio requirement in Norwegian tax law, but general interest limitation rules apply (see below). For companies that are part of a group, adjustments to deductible interest costs may be made under the arm’s-length principle. Generally, such adjustments may be made 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 financial capacity and its creditworthiness, which depends on several elements, such as the nature of the business, financial status, future income possibilities, financial guarantees, group relationships, etc. As such, there is no applicable 'safe harbour'. The company must also be able to service its debts. Typically, a thin capitalisation challenge from the tax authorities will be based on comparisons of key ratios indicating the company’s debt servicing capacity.
If a Norwegian entity is regarded as being thinly capitalised, part of the entity’s interest and debts may be reclassified to equity.
Interest deduction limitation
In 2014, interest deduction limitation rules were introduced in Norway to limit the extent to which companies could deduct interest expenses to related parties. These rules apply where annual net interest expenses exceed a threshold amount of NOK 5 million per company. Where the threshold amount is exceeded, the right to deduct interests on debt to related parties is limited to 25% of taxable earnings before interest, taxes, depreciation, and amortisation (EBITDA). To be considered a related party, direct or indirect ownership or control by at least 50% is required.
With effect from 2019, new interest deduction limitation rules have been introduced. The amended rules apply to companies that are part of a consolidated group for accounting purposes, and limit interests to both related and unrelated parties. The threshold amount, which determines whether the rules apply, was increased to NOK 25 million for the Norwegian part of the group as a whole. Where the threshold amount is exceeded, deductions are limited to 25% of taxable EBITDA. Further, an equity escape clause has been introduced.
The equity escape clause may be applied either to each Norwegian company separately, or to the Norwegian part of the consolidated group as a whole. In the first case, the equity ratio in the balance sheet of the Norwegian company is compared with the equity ratio in the consolidated balance sheet of the group. In the other case, the equity ratio for a consolidated balance sheet of the Norwegian part of the group is compared with the balance sheet of the group. In both cases, the Norwegian equity ratio must be no more than two percentage points lower than the equity ratio of the group as a whole. A company qualifying for the equity escape clause may deduct its full interest expenses, except interest expenses exceeding NOK 5 million to related parties outside of the group.
Several adjustments have to be made to the balance sheet of the Norwegian company or the Norwegian part of the group when calculating the equity ratio. In case different accounting principles have been applied in the local Norwegian accounts and group accounts, the local accounts must be adjusted in line with the principles applied in the group accounts. In addition, goodwill (or badwill) and other (positive or negative) excess values in the group accounts relating to the Norwegian company or the Norwegian part of the company group must be allocated to these entities. The local balance sheets must also be adjusted for shares in and claims against other group companies. Shares in group companies shall be set off against equity and total assets, whereas claims against group companies shall be set off against debt and total assets. The equity ratio of the Norwegian company, or the Norwegian part of the group, shall be compared with the equity ratio in the group accounts. The comparison can be made with group accounts prepared under NGAAP, IFRS, IFRS for SMEs, local GAAP of an EEA country, US GAAP, or Japanese GAAP. The group accounts and the local accounts for the Norwegian company or the Norwegian part of the group, including the above-mentioned adjustments, must be approved by the auditor.
The previous interest deduction limitation rules, which apply to interest expenses to related parties, remain in force for companies that do not belong to a consolidated group for accounting purposes. These rules will also continue to apply to companies that belong to a group and have interest expenses to a related party outside of the group.
As announced in the 2020 state budget, the Ministry of Finance has introduced minor editorial and clarifying changes to the interest limitation rules. A surviving entity of a merger may not claim the escape clause on a company level. The entity may, however, claim the escape clause on a group level if the Norwegian equity ratio is no more than two percentage points lower than the equity ratio of the group as a whole. Further, the definition of 'group companies' is amended to only apply to companies that could be consolidated according to IFRS.
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.