Newsletter Shipping
1. The 2012 National Budget
Today the National Budget for 2012 was presented by the Government. Below is a short description of the highlights.
1.1 No changes for the maritime industry
The budget proposal does not contain any changes to the Norwegian tonnage tax regime or the tax incentives for seafarers.
1.2 Proposed amendments to the general tax rules
The Government proposed certain general changes in the tax law that is relevant for the shipping industry. The most significant changes are the following:
Proposed changes to the participation exemption regime
The Government has proposed the following amendments to the participation exemption regime:
- Capital gains on shares in limited liability companies and partnerships accruing to Norwegian companies will be tax free, i.e. 3 % of the income will no longer be subject to tax. The 3% rule will in the future only apply to distributions from limited liability companies and partnerships.
- Distributions from partnerships will as of 2012 be subject to tax on 3 % of the income, in the same manner as for dividends from limited liability companies
- Distributions within a group will not be subject to tax on 3 % of the income provided that the ownership is more than 90%. The rule will apply equally to distributions to/from group companies within the EEA/EU.
The rules are expected to take effect from 1 January 2012.
Proposal that loss on intercompany debt should not be tax deductible
The Government has proposed that loss on debt shall not be tax deductible provided that the lender is a part of the same tax group as the debtor (more than 90 % ownership directly or indirectly).
The rule will apply equally to limited liability companies and partnerships. Furthermore, the rule will apply to debtors which are foreign companies. There are some exceptions to this rule, e.g. the rule will not apply to debt related to accounts receivable and group mergers and demergers.
The rule is expected to take effect from 6 October 2011.
Taxable correction income proposed abolished
Rules regarding taxable correction income related to distribution of income which not yet has been taxed are proposed abolished.
The change is expected to take effect from 1 January 2012.
2. Norwegian tonnage tax – flagging requirement
Whether there will be a flagging requirement in the Norwegian tonnage tax system for the fiscal year 2011 is not yet announced. However, it is expected that this will be announced shortly. Once the announcement is made we will send out a short news alert.
3. District Court Ruling – BW Gas lost claim for compensation for unconstitutional retroactive tax
7 July 2011 the Oslo District Court (ODC) gave a ruling regarding BW Gas’ claim for compensation for losses sustained as a result of the unconstitutional retroactive taxation levied in 2007 upon transition to the new Norwegian tonnage tax system. In total the claim amounted to approximately MNOK 442. The ODC did not uphold the plaintiffs’ claims, but gave judgment in favor of the Norwegian government. BW Gas Ltd and BW Gas AS had to pay costs of action.
The BW Gas Ltd and BW Gas AS (with Norwegian subsidiaries) claimed compensation for the following costs inflicted by the incorrect tax assessment:
- Net cost increase of interest and loan
- Cost relating to refinancing
- Restructuring cost for the BW Gas Group
- Recapitalization cost for the BW Gas Group
- Other expenses relating to “stay on bonus” for key personnel within the group
The plaintiffs argued that the Parliament was liable to damages as it had infringed domestic Norwegian law and the European Convention on Human Rights (ECHR) when enacting the transition rules.
The ODC found that the BW Gas’ subsidiaries in Norway were not entitled to indemnification as they had not suffered any direct loss as a result of the incorrect tax assessment. The argument was that the unconstitutional taxes were repaid with interest to these companies.
Furthermore, ODC refused that BW Gas Ltd and BW Gas AS, which was not directly subject to the unconstitutional taxation themselves, should be indemnified as there was no basis of liability for the Norwegian Parliament.
The justifications were:
- There is no strict liability for the Parliament for its legislative enactments infringing the Constitutional law. Furthermore, taken all facts and circumstances in consideration, there were no reason to place a strict liability due to the unclear extent of the legislative power. ODC argued that such a liability may result in a greater legislative discretion than needed to govern the country and to be in accordance with democratic principles.
- It was not criticisable that the Parliament had not requested the Supreme Court to give an opinion during the legislative process. Such a request would imply a change of the constitutional practice. Therefore, the Parliament had not been negligent as legislator when passing the transition rules, and thus had no liability
Further, the ODC ruled that there was no discrimination under ECHR protocol 1 article 1, as the situation for the group fully restored; the companies had received full repayment with interest, a judgment from the Supreme Court and new statutory provisions.
4. Norwegian Transfer pricing - Call for tender on valuation services from the Norwegian Tax Administration
The Norwegian Tax Administration (“NTA”) recently made a public call for tender regarding valuation services in tax and VAT matters. Due to recent years’ focus on intra-group transfers and restructurings the NTA has seen an increased need for competence within the field of valuations. Even if it is unclear what this will result in, it certainly indicates that a taxpayer planning larger restructurings should pay special attention to any related valuation.
Companies operating within the shipping industry often have intra-group transactions including extensive amounts, such as bare boat leases. It is advisable to review and assess the appropriateness of the pricing models applied and any related valuations.
5. Changes to the UK Tonnage Tax Regime
The HMRC announced 3 October certain changes to the application of the UK tonnage tax regime, the key feature being in relation to the application of the “strategic and commercial management test”.
Previously, the HMRC have taken the view that the “strategic and commercial management test” required the day-to-day technical management of vessels within the regime to take place in the UK. The announcement from the HMRC reconfirms that HMRC do not considered this to be an absolute requirement for the application of the UK tonnage tax regime. Likewise, this also applies to time-chartered-in tonnage.
Furthermore, the HMRC confirmed that
- the interpretation and application of the UK tonnage tax regime should be done in line with the “State Aid Guidelines”
- there is room for a flexible approach regarding the application of the UK tonnage tax regime, i.e. a holistic approach where all fact and circumstances may be taken into consideration
- where a company voluntarily and temporarily ceases to operate any qualifying ships, it may nevertheless remain within the UK tonnage tax regime, e.g. where a gap occurs between the sale of a ship and the acquisition of a new ship
- it is required that a UK tonnage tax company or group must make a substantial economic contribution, directly or indirectly, to the UK
It is hoped that the new approach taken by the HMRC will make the UK tonnage tax regime more stable and competitive internationally, and thus maintain and attract shipping groups to locate to the UK.
6. Proposed Reforms to Taxation of Australian Shipping Industry
In a press release 9 September 2011, the Australian Government proposed major reforms to the taxation of Australian shipping industry. The centerpiece of the tax proposal is the introduction of a tax exemption regime for Australian ship operators, which delivers an effective tax rate of zero on the qualifying elements of corporate income tax. However, this benefit may be timing only as any dividends paid by the Australian company out of these earnings will be unfranked and potentially subject to up to 30% dividend withholding tax, subject to Treaty protection.
To get the benefit of this tax exemption, Australian shipping companies will have to make a 10 year “lock in” commitment to being Australian registered ships and meeting Australian maritime safety conditions.
Access to the tax exemption is also contingent on meeting a minimum training requirement, ensuring that industry plays its part in securing a stable maritime skills base.
Draft legislation will follow shortly and is expected to be effective from 1 July 2012.
Other components of the tax regime for Australian shipping include:
- a tax scheme combining a reduction in the depreciation period from 20 to 10 years, a balancing charge deferral, and, if ineligible for the exemption, a favorable capital gains taxation on vessels (roll-over relief)
- an exemption from royalty withholding tax for bareboat charters to Australian lessees – it is expected that this will only apply to vessels which qualify for the tax exemption in the hands of the lessee; and
- a seafarer's tax concession for Australian employers (i.e. by way of a refundable tax credit) where their employees spend at least 91 days on international voyages on an eligible vessel.
As part of the reform, it is also proposed to establish an Australian international shipping register.
The reform is expected to make the tax regime for the Australian shipping industry more competitive internationally.
7. Annual seminar regarding shipping taxation
The annual shipping taxation seminar will be held at BI Norwegian Business School in Oslo and Bergen 10 and 12 January 2012 respectively. The seminar is held jointly with representatives from Ernst & Young, Norwegian Shipowners’ Association and the Central Office for Taxation of Large-Sized Enterprises.
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