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Norway publishes fiscal budget for 2024
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Executive summary
On 6 October 2023, the Norwegian Government published its proposal for the 2024 Fiscal Budget and a proposal to introduce resource-rent tax on onshore wind power. The Budget will now be discussed by the Norwegian Parliament and, subject to any potential changes, it is expected to be approved in December 2023. It is proposed that the resource-rent tax for onshore wind power will be introduced from the 2024 fiscal year, but with transitional arrangements for existing wind farms.
An extension of foreign individuals' and entities' Norwegian tax liabilities when taking part in certain activities on the Norwegian continental shelf and within the 200-nautical-mile zones are proposed. Is it suggested that the new rules should be effective as of 1 January 2024.
In addition, the Budget Proposal includes a provision that would add a tax exemption in the event of a cross-border merger of mutual funds that are Undertakings for Collective Investment in Transferable Securities (UCITS) funds. In addition, certain adjustments to the interest rate limitation rules are proposed to avoid "undesirable" tax planning.
It was expected that the Budget would contain proposals for the implementation of the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework's rules on global minimum taxation for large groups (Pillar Two). A proposal to introduce these rules into Norwegian law was submitted for consultation in June this year, with a shortened two-month consultation period.
It seems that perhaps the original schedule was too ambitious; the Government announced that it aims to put forward a proposal later this fall. Although the assumed timetable for introducing the rules on global minimum taxation is somewhat delayed, it is still planned that the rules will take effect in Norway from and including 2024.
Detailed discussion
Taxation of foreign individuals and companies on the Norwegian continental shelf
Introduction
The Government proposes to extend the tax liability for foreign individuals and entities that participate in the following business activities on the Norwegian continental shelf and in the 200-nautical-mile zones:
- Exploration or extraction of minerals on the Norwegian continental shelf
- Exploration or exploitation of renewable energy resources in the 200-nautical-mile zones
- Exploration and exercising of carbon handling in the 200-nautical-mile zones and on the Norwegian continental shelf
The proposal also covers various types of ship transport, supply services and service activities in connection with these exploration-related business activities (e.g., transport of personnel and catering activities), as well as activities in connection with the construction and maintenance of facilities. The proposal would give the Ministry of Finance authority to exempt certain types of ship transport from tax liability. If the proposal is adopted, the Ministry of Finance will exempt ship transport of minerals and CO2 in accordance with this provision.
Proposal's impact on current exemption from tax liability for foreign companies in shipping industry
The current rules provide an exemption from tax liability for foreign companies that have assets and income from the ownership and operation of their own or chartered vessels in international traffic, or their own or chartered drilling and construction vessels in international operations. The exception does not apply to businesses that are liable for tax under the Norwegian Petroleum Tax Act.
The Government proposes to introduce a similar restriction for business activities comprised by the new proposal. This implies that foreign companies that would initially be exempt from taxation in Norway under the current rules nevertheless would be subject to tax in Norway if the business activities are linked to the exploration and extraction of mineral deposits on the continental shelf, exploration and exploitation of renewable energy resources in the 200-nautical-mile zones and exploration and exercising of carbon handling in the 200-nautical-mile zones and on the Norwegian continental shelf.
Impact on withholding tax rules for interest and royalties
The Ministry of Finance will assess whether these changes would require any changes to the Norwegian rules on withholding tax in interest and royalties, etc.
Impact on tonnage tax rules
The Norwegian tonnage tax rules cover operations with auxiliary vessels in petroleum operations. Tonnage taxed companies cannot, however, have income from vessels that operate on the Norwegian continental shelf when the activities are subject to taxation under the Norwegian Petroleum Tax Act. Further, the tonnage tax rules do not cover the operation of wind turbine vessels in Norwegian territorial waters, provided that similar operations would trigger Norwegian tax liability for companies that are not domiciled in Norway.
The proposed tax liability for mineral activities, etc. affects several types of vessels and the Government states that, in the long run, an assessment must be made to reveal whether there is a need for a similar limitation of the tonnage tax rules for vessel operations covered by the new rules. Introduction of such a change would probably imply that tonnage taxed companies could only have bareboat income from vessels that have assignments on the Norwegian continental shelf/territory related to mineral activities etc.
The changes are proposed to be introduced with effect from 1 January 2024.
Introduction of resource-rent tax on onshore wind power and increase in production tax
Introduction
As expected, the Government proposes to introduce a resource-rent tax on onshore wind power, that shall apply in addition to ordinary corporate income tax. The tax will cover wind farms consisting of more than five turbines, or with a total installed capacity of one megawatt (1 MW) or higher. The proposed rules are largely based on the consultation paper, although the paper was met with considerable opposition during the consultation process. The most important change from the consultation paper is that the effective tax rate has been reduced by 5 percentage points from 40% to 35%. The rules are proposed to enter into force as of fiscal year 2024.
It is important to note that the proposal implies that the resource-rent tax will also be introduced on existing wind power plants. Although the proposal has been adjusted somewhat compared with the consultation paper, the tax will affect existing wind farms significantly.
Determining the tax base
The most important rules for determining the tax basis for resource-rent tax on onshore wind power are as follows:
- As a general rule, revenues from power production shall be determined at the spot market price. Exemptions apply to physical and financial contracts concluded before 28 September 2022. These physical contracts shall be valued at the contract price and losses and gains on financial contracts shall be taken into account according to further specified rules. There are also exceptions for standard fixed-price agreements that are valued at the contract price. In addition, the proposal would provide similar exemptions for certain physical contracts concluded in the period 2024 to 2030. (The latter proposal is new, added to the proposal since in the consultation paper.)
- Resource-rent income also includes income from electricity certificates, guarantees of origin and gains on realization of fixed assets.
- The proposed resource-rent tax is designed as a cash flow tax with immediate deductions for new investments. For historical investments, there is a deduction for the remaining tax value through depreciation (see more about this below). Losses on the realization of fixed assets are also deductible.
- Operating expenses that are sufficiently related to the resource-rent taxable income are deductible. Finance expenses and sales and marketing expenses are not deductible. There are further limitations on deductions for payments to landowners. Property taxes, but not voluntary payments to municipalities, are tax deductible. In addition, resource-rent-related corporate tax is deductible from the basis, in the same way as in the other resource-rent taxes.
Negative resource-rent income
In the resource-rent tax for hydropower, negative resource-rent income in one plant can be recognized against positive resource-rent income in another plant within the same tax group. In addition, the tax value of negative resource-rent income is paid from the state to the taxpayer.
Similar rules are not proposed for resource-rent tax on onshore wind power. The government proposes that negative resource-rent income from one wind power plant cannot be recognized against positive economic rent income from other wind power plants owned by the same taxpayer. Instead, negative resource-rent income plus a risk-free interest rate can be carried forward as a deduction for subsequent years' positive resource-rent income from the same wind power plant.
Upon termination of operations, removal of wind farms and return of the area in accordance with the license, a revenue settlement shall be made for fixed assets related to power production. If the annual resource-rent income, including carried forward, negative resource-rent income from previous income years, becomes negative, the government pays the taxpayer the tax value of the negative resource-rent income.
Treatment of resource-rent tax on existing wind power
The resource-rent tax will also be introduced on existing wind power plants. The remaining tax value of the investments shall be deducted through depreciation. For wind farms that have been covered by straight-line depreciation over five years, there may be little remaining tax value, and the tax will therefore impact these wind farms particularly hard. The Government proposes that these taxpayers can instead calculate the tax input values based on ordinary declining balance depreciation rules. Depreciation under ordinary declining balance depreciation rules can be deducted from resource-rent income going forward (but not faster straight-line depreciation).
As the remaining value of the fixed assets is depreciated over time, and not directly (which is the case for new investments), the proposal introduces a "waiting interest." The interest rate shall be a specified risk-free rate.
Increase in production tax and its connection to resource-rent tax
To ensure that the municipalities where the wind farms are located receive a larger share of the tax proceeds, the government proposes to increase the production tax from 0.020 to 0.023 Norwegian krone (NOK) per kilowatt hour (kWh). The production tax can be deducted cent by cent from the assessed resource-rent tax. If the production tax exceeds the resource-rent tax for the income year, the excess may be carried forward as a deduction in later income years with interest stipulated by the Ministry in regulations.
The initial consultation paper also proposed the introduction of a natural resource tax, which is not part of the new proposal.
Elimination of high-price contribution for wind and hydropower
Last year, the Government introduced a high-price contribution (tax on power generation). The excise duty of 23% hit power sold at more than 0.70 NOK/kWh. The high-price contribution applied to the majority of the hydropower plants and wind farms in Norway.
The Government proposes to discontinue the high-price contribution from 1 October 2023. The proposal is subject to the Parliament's decision in December before it can be implemented. Power producers must therefore continue to report and pay the high-price contribution for October and November, but this can be corrected in the tax return following the Parliament's decision. Taxes paid for October and November will then be reimbursed by the Norwegian Tax Administration.
Tax neutral cross-border mergers of mutual funds that are UCITS funds
The Government proposes that cross-border mergers of mutual funds that are UCITS funds can be conducted without immediate taxation if certain conditions are met.
For the time being, a similar rule is not introduced for cross-border demergers for mutual funds that are UCITS funds. However, it is still possible to apply to the Government for an exemption on a case-by-case basis.
The change is proposed to enter into force immediately with effect from the fiscal year 2023.
Amendments to tax-base rules for merger and demerger receivables
In the event of a merger or demerger where the consideration is issued from the acquiring company's parent company (i.e., triangular merger and triangular demerger), a claim is established between the acquiring company (debtor) and the parent company (creditor). The receivable forms the basis for the parent company's issuance of consideration shares to the shareholder of the merged/demerged company and has a nominal value corresponding to the accounting equity transferred to the subsidiary in connection with the merger/demerger.
Under the current rules, the tax base of these receivables corresponds to the tax base of the equity, which often results in a difference between the tax and accounting value of the receivable. In the event of subsequent realization of the receivable, tax liability will be triggered for capital gains or deductions for losses for the parent company and subsidiary, respectively.
The Government proposes that the tax base on merger and demerger receivables is set at the nominal value of the receivables. This change implies that realization of the receivables should no longer trigger taxable gains or deductible losses.
The change is proposed to enter into force immediately, with effect from fiscal year 2023.
An optional transitional rule is proposed for companies that have a latent tax position on unrealized merger or demerger receivables at the end of fiscal year 2023. Under the proposed transitional rule, companies with a latent tax position may choose to offset the difference between the tax and accounting basis of the receivable tax free, if both the parent and subsidiary make the same decision.
Changes to the interest deduction limitation rules
Based on a consultation paper that was published on 12 April 2023, the Government proposes to make two changes to the interest deduction limitation rules to make them more robust against tax planning.
Interest expenses to related parties outside the group
For companies in a group, the interest limitation rules entail that interest deductions exceeding 25% of taxable earnings before interest, taxes, depreciation and amortization (EBITDA) (the "deduction capacity") are disallowed unless the company can invoke the equity escape clause or net interest expense combined in the Norwegian part of the group is below the threshold amount of NOK 25m. Irrespective of the equity escape clause and the threshold, group companies may nevertheless experience limitations on the deductibility of interest if the entity has net interest expense to related parties outside the group that exceeds 25% of the taxable EBITDA (the "EBITDA rule between related parties").
The Government points out that the current rules may provide tax-planning incentives where companies belonging to a group, which would otherwise have had net interest expenses on debt to related parties outside the group, can avoid this by channeling the debt via another company in the group.
To avoid such arrangements, the Government proposes that if a group entity has debt to related parties outside the group, net interest income on debt to group companies shall be excluded when applying the EBITDA rule between related parties. The provision will only have an impact on group companies that remit/owe interest expenses to related parties that are not part of the same group for the purpose of the interest deduction limitation rules.
It is proposed that the changes enter into force immediately with effect from the fiscal year 2024.
Group contribution and calculation of the deduction capacity
When calculating the deduction capacity under the interest deduction limitation rules, group contributions received from companies that use the equity escape clause should not be included in the taxable EBITDA. The purpose is to avoid arrangements where companies that use the equity escape clause simultaneously make group contributions that increase the deduction capacity in a company that cannot invoke equity escape clause.
However, the Government points out that the current rules can be circumvented by giving group contributions from a company that uses the equity escape clause to a company that does not use the equity escape clause, via a third company that does not use the equity escape clause.
Therefore, it is proposed that if a company has received group contributions from a company that has not invoked the equity escape clause, the group contributions shall still be deemed to have been received from companies that use the equity escape clause if the providing company has itself received group contributions from a third company that does use the equity escape clause. In such cases, the amount deemed to have been received from companies that use the equity escape clause is limited to the amount of group contributions the providing companies have received from companies that do invoke the exemption rule.
Further, it is also proposed that group contributions received from companies within the financial and petroleum industry which are exempt from the interest limitation rules are not included when calculating the deduction capacity.
It is proposed that the changes enter into force immediately with effect from fiscal year 2024.
Direct deduction of fixed assets with an acquisition cost of NOK 30k or less
Under the current rules, fixed assets that have a shorter economic life than three years or an acquisition cost of less than NOK 15k can be deducted directly in the acquisition year. If the asset is considered both permanent and substantial, it shall be capitalized, and the balance depreciated. In the Budget, the Government proposes increasing the limit for direct deduction of non-substantial fixed assets to NOK 30k. Under the proposed rule, depreciated assets can be directly deductible when the residual value is reduced to NOK 30k or lower.
The change is proposed to take effect as of the fiscal year 2024.
For additional information with respect to this Alert, please contact the following:
EY Norway, Oslo
- Njaal Arne Høyland
- Tone Marit Frøland-Blank
- Petter Aa Bjørklund
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.