A Norwegian resident company is, as a starting point, subject to corporate income tax (CIT) on its worldwide income. Non-resident companies are, as a starting point, liable for CIT in Norway when engaged in a business that is either conducted in or managed from Norway.
CIT is, in general, assessed at a rate of 22%. Certain companies within the financial sector are assessed at a CIT rate of 25%.
As a general rule, income is taxable when the right to receive it arises and costs are deductible when the liability to cover the costs arises. The actual payment is generally not relevant.
Petroleum tax regime
All upstream petroleum activity on the Norwegian Continental Shelf (NCS) is taxable to Norway.
Taxation is based on net income at a marginal tax rate of 78%, which comprises the ordinary 22% CIT rate and a 56% special tax. All income is subject to 22% CIT, while only income from offshore production and pipeline transportation of petroleum on the NCS (offshore tax regime) is subject to the additional 56% special tax.
Following the 2022 shift to a ‘sequential’ tax system, tax on upstream petroleum tax activities is calculated in two steps. Firstly, the tax in the ordinary 22% tax base is calculated. The resulting tax amount is then deducted from the special tax base, on which a ‘technical special tax rate’ of 71.8% is applied in order for the overall effective tax rate to remain 78%:
|Income subject to 78% tax = 100|
|Ordinary corporate tax:||100 * 22% = 22|
|Special tax base:||100 - 22 = 78|
|Special tax:||78 * 71.8% = 56|
|Total tax:||22 + 56 = 78|
All upstream activity on the NCS must be consolidated within the company. There is no ring fence per oil field, and tax consolidation against other activity is limited.
Crude oil sales from most of the fields are taxed at a predetermined market price set by an official board (i.e., the ‘norm price’). In theory, a norm price may be imposed on gas sales, but this has not been implemented in practice. A company may apply for a binding ruling for pricing of intercompany sales of gas, but not many companies have used this opportunity. The pricing of intercompany sales of gas must be in accordance with the arm’s length principle.
Under the Petroleum Tax Act, investments on the NCS can be deducted in the year of investment in the special tax base (i.e., against 71.8% tax). In the ordinary 22% tax base, the same investments must be depreciated on a linear basis over six years.
The tax value of losses (both exploration losses and other losses) in the special tax base (71.8%) is refunded by the Norwegian State as a general loss refund. The general loss refund for Year 1 is paid as a cash payment part of the ordinary tax settlement, i.e. in Year 2. The loss refund can be pledged as security for external financing.
The ordinary corporate tax value of losses (6.2%) is not refunded. It must be carried forward without interest. For companies in the closing down phase, there is a risk that this tax value will never be recovered.
Special rules apply as to the deductibility of net interest costs in the special tax basis.
A special regime ensures that transfer of licences on NCS is tax exempt; there is no step up in the tax basis.
Note that dividends that stem from income subject to the special tax regime are exempted from dividend withholding tax (WHT).
The Oil Taxation Office (OTO) has a special responsibility for the taxation of the petroleum sector. Generally, the OTO has a high focus on transfer pricing.
As part of the financial measures for Norwegian businesses in relation to the COVID-19 situation, temporary amendments to the upstream petroleum tax regime were made for 2020 and 2021. These amendments continue to be effective for investment costs incurred in subsequent years to the extent such costs are part of a Plan for Development and Operation (PDO) or a Plan for Installation and Operation (PIO) (or application for exemption from such Plan) submitted by year-end 2022 and approved by the Ministry of Petroleum and Energy by year-end 2023. The amendments will apply for costs incurred until the start of production.
Hydropower tax regime
The hydropower tax regime applies to income derived from the production of hydroelectric power in plants having an installed nominal capacity of 10,000 kVA.
Net income from the production of hydroelectric power is taxable both at the ordinary 22% corporate tax rate and at a 57.7% resource rent tax. The ordinary corporate tax is deductible in the basis for the calculation of the resource rent tax, resulting in an overall marginal tax rate of 67%.
The resource rent is calculated per hydro power plant. The gross income is, with some exceptions, calculated as the annual spot market price per hour multiplied by the plant’s actual power production. Actual income from power sold under certain standardized long-term power purchasing agreements (PPAs) are, however, recognised for resource rent purposes. In addition, actual income from green certificates and certificates of origin is included. Generally, expenses related to the power plant are deductible, with the exception of interest costs, which are non-deductible for resource rent purposes.
For resource rent purposes, investments in hydropower plants are deducted according to special rules. Investments made after 1 January 2021 may be fully deducted in the year in which they are made. Investments made before this date are depreciated according to separate rules and will give entitlement to uplift. Rent expenditure and depreciation related to waterfalls are never deductible. Waterfalls are not included when calculating uplift on investments made before 1 January 2021.
Tax consolidation is mandatory within each hydropower producing company and is available on a group level provided the conditions for group taxation are met. Losses (negative resource rent) on a company level (eventually on a group level) will be compensated by the Norwegian state.
In addition to ordinary corporate tax and resource rent tax, income from hydropower production is subject to natural resource tax and a so-called high price contribution. The natural resource tax is creditable against ordinary corporate tax (we refer to a separate section covering this). The high-price contribution is an excise duty of 23% payable on any portion of the average power price obtained per month exceeding NOK 0.7/kWh. On top of ordinary corporate tax and resource rent tax, the high-price contribution entails a marginal tax rate of 90% on income from hydropower production at price points above the threshold.
Shipping tonnage tax regime
The tonnage tax rules in Norway are generally in line with those found in other EU/EEA countries and imply that shipping income will be tax-exempt on a permanent basis. On 14 December 2017, the European Free Trade Association (EFTA) Surveillance Authority (ESA) announced that the Norwegian tonnage tax regime is approved for a new ten-year period, with certain amendments.
Norwegian tonnage-taxed companies are allowed to keep only certain kinds of assets inside the tonnage regime (legal assets) and are not allowed to have income from non-tonnage-taxed activities except some financial income. If the requirements are not fulfilled, the company will fall outside the scope of the model and be taxed at the ordinary rate (22%).
On 24 September 2021, the Norwegian Ministry of Finance sent a proposal on changes to the tonnage tax regime for consultation. The proposal entails that a single company may, under certain terms, be able to have both qualifying and non-qualifying income without being disqualified from the regime. The non-qualifying income would then be subject to tax at the ordinary tax rate of 22%, whereas the qualifying income would remain tax exempt. It was proposed that the rules would enter into force from the income year 2022 but the proposal has not been entered into force and we are still waiting for development in this regard.
A tonnage-taxed company must own at least one qualifying asset (i.e. a vessel, for example bulk tankers, container vessels, car carriers, tugboats, and entrepreneurial vessels and auxiliary vessels for use in the petroleum industry), new building contracts, a 3% share in another tonnage-taxed limited company, or a 3% ownership interest in a qualifying partnership or controlled foreign company (CFC).
One of the important amendments from the ESA announced in December 2017 relates to the inclusion of windmill farm entrepreneurial vessels to the regime. More precisely, this means that vessels engaged in the construction, maintenance, repair, and disassembly of windmills at sea are eligible under the scheme as of the income year 2017.
Non-self-propelled barges are eligible for the tonnage tax regime with effect from 1 January 2018, provided certain conditions are met.
Qualifying and legal business activities/income
Qualifying business income is income from the operation of the company’s own and chartered vessels. With effect from 1 January 2018, there are limitations on chartering out vessels on bareboat. The limitations on bareboat chartering out in the approved regime are different for vessels in the offshore sector and vessels outside the offshore sector (traditional shipping).
The following limitations apply for bareboat chartering out in the offshore sector:
- Chartering out on bareboat terms may not exceed 50% of the company's fleet during an income year, alternatively over a period of four years.
- Bareboat chartering out must not exceed a contract period of five years, with a possibility to extend the contract by another three years.
- The strategic management of vessels chartered out on bareboat terms must be carried out from an EEA state.
On bareboat chartering out outside the offshore sector, a distinction must be made between contracts regarded as operational lease and financial lease.
Chartering out on contracts regarded as financial lease are not permitted under the regime.
Bareboat contracts regarded as operational lease are allowed with the following limitations:
- Chartering out on bareboat terms may not exceed 40% of the fleet per income year, alternatively over a period of four years.
- The chartering period may not exceed one half of the vessel's life-time.
- The strategic management of vessels chartered out on bareboat terms must be carried out from an EEA state.
For both the offshore sector and traditional shipping, the share of allowed bareboat chartering out is measured on group level.
The limitations on bareboat chartering out will not apply to existing contracts that are not regarded as long-term. The assessment of what constitutes a long-term contract are different in and outside the offshore sector. Further, a transitional period will be implemented for the companies subject to the updated rules.
Chartering in of vessels on time-charter terms is limited to 90% of non-EEA flagged vessels. These rules are not applicable for existing time-charter contracts.
Furthermore, gains upon disposal of vessels and new building contracts are exempt from taxation.
Income from related activities, such as the sale of goods and services onboard vessels, loading and discharging vessels, or leasing out containers and operations of ticket offices, is also exempt from taxation. The exemption also applies to income from the strategic and commercial management of the company’s owned and chartered vessels, as well as vessels owned or operated by group companies (more than 50% joint ownership), and vessels operated according to a pool agreement. Pure management companies are not included (i.e. all companies must have at least one qualifying asset).
Financial income is permitted, except for income from shares in unlisted companies and ownership interests in partnerships that are not taxed under the tonnage tax system. The condition is that financial activities do not constitute a separate business. Net financial income is subject to ordinary taxation (22%). Currency gains and losses are partly taxable/deductible, and interest costs are partly deductible, depending on the proportion between the company’s finance capital and total book capital.
Withholding tax (WHT)
With effect from 1 July 2021, Norway introduced domestic legal authority to impose royalty WHT at 15% on payment to related parties in low-tax jurisdictions. With effect from 1 October 2021, the new rule will also apply to lease payments for ships and other physical assets paid to related parties resident in low-tax jurisdictions.
Payments from Norwegian tonnage taxed companies are, however, exempt from the new WHT rule.
Entrance into the tonnage tax system
Entry into the tonnage tax system is optional and may take place with effect from 1 January every year, provided that the company has fulfilled the conditions for the application into the tonnage tax system from the beginning of the year. Newly established companies will have direct entry and may enter into the tonnage tax system from the date of incorporation. All qualifying companies within the same group are obligated to make the same election (tonnage taxation or ordinary taxation).
Companies that enter into the tonnage tax system are subject to a formal ten-year lock-in period. If a company exits the tonnage tax system before the lock-in period expires, it will be excluded from the tonnage tax system until after the initial lock-in period has ended.
Upon entry into the tonnage tax system, the difference between market value and tax value of the company’s assets (including vessels, new building contracts, ownership interests in partnerships, and shares in CFCs/tax exempt assets) is taxed as a capital gain (22%) that can be transferred to the gain and loss account. 20% of the balance will be entered as income each year (balance method). There is continuity for financial assets and assets covered by the tax-exemption rules (qualifying shares and derivatives).
Exit from the tonnage tax system
A shipping company may exit the regime on a voluntary basis or may be obligated to do so after breaching specific company requirements within the tonnage tax system. There should be no exit charge when leaving the regime, and the tax value on the company’s assets will be adjusted to market value at the time of exit. However, a company that has untaxed gains calculated upon entry into the tonnage tax system could have a tax liability upon exit.
Local income taxes
There is no county or municipal CIT in Norway.