Proposed extended tax liability for foreign companies on the Norwegian continental shelf

The Ministry has sent a proposal to extend the taxing rights for activities on the Norwegian continental shelf on public consultation.

In brief

• The Ministry’s proposal introduces a limited tax liability for income derived by non-residents on the Norwegian continental shelf.
  
• It covers exploration and exploitation of renewable energy resources, carbon management and mineral deposits.
• Other auxiliary activities, such as income from transportation of supplies or personnel, are also covered.
• The proposal includes extending the taxing right for foreign residents’ employment income derived from such activities on the continental shelf.

On 21 February, the Norwegian Ministry of Finance (the Ministry) published a consultation document. It proposes to extend the taxing right for foreign resident persons and businesses carrying out operations within exploration and exploitation of renewable energy resources, exercising carbon management (including capture, utilization, storage and transport) and mineral exploration and extraction on the Norwegian continental shelf. The deadline for consultation input is 21 May 2022. The Ministry proposes that the changes will enter into effect immediately if adopted.

According to the proposal, the extended tax liability aims to capture non-resident persons and companies participating in relevant activities on the Norwegian continental shelf. This also includes income from auxiliary activities and employment derived from such activities on the continental shelf. The proposal entails a substantial expansion of the taxation right for activities on the Norwegian shelf related to exploration and exploitation of renewable energy resources, carbon management and mineral activities.

Under the current rules, persons and companies that are tax residents in Norway are liable to tax on income from activities carried out on the Norwegian continental shelf. Non-residents are, on the other hand, not liable to tax in Norway when the activities take place outside the Norwegian territorial line (12 nautical miles) unless the activities are related to petroleum activities (including auxiliary activities).

The proposal intends to address this unequal treatment by resident and non-resident taxpayers when conducting the same activities on the continental shelf by introducing tax liability on non-resident taxpayers.

The deadline for consultation input is 21 May 2022. If adopted, the rule will take effect immediately.

Who will be affected by the proposal?

If adopted, the rules will apply to non-residents engaged in certain forms of activities on the Norwegian continental shelf, including non-residents participating in such activities as contractors or sub-contractors.

The proposal also covers income from auxiliary activities, such as supply services and various forms of transport activities, on the continental shelf. Finally, it is proposed to extend the taxing right for non-residents deriving income from employment in connection with such activities.

The activities proposed to generate taxing rights when carried out on the continental shelf are:

• Renewable energy resources
• Carbon management
• Mineral activities

Renewable energy resources

The proposal covers income from the exploration and exploitation of renewable energy resources on the continental shelf. “Renewable energy resources” intends to capture all current and future renewable energy sources and should be interpreted in a technology-neutral manner. The proposal covers a wide range of activities, for example, preliminary technical examination of renewable energy resources, including any examinations of the conditions of the seabed.

Carbon management

Income from carbon management intends to capture all activities on the continental shelf connected to the exploration, exploitation and other forms of carbon management, including storage reservoir and transport of CO2. “Carbon management” is broadly defined to capture all current and future methods of carbon capture and storage on the continental shelf.

Mineral activities

Income from exploration, including examinations and mapping, and extraction of mineral deposits on the continental shelf is also proposed to constitute a limited tax liability for foreign residents.

It is also proposed to introduce a limited tax liability on income from exploration, including examination and mapping, and extraction of mineral deposits on the Norwegian continental shelf when conducted for commercial purposes. The proposal also captures income from geological, geophysical, geochemical and geotechnical activities and operations and use of facilities to the extent they are used to explore minerals on the continental shelf.

What is the effect of the proposal?

The proposal targets non-residents operating on the Norwegian continental shelf. The new rules are proposed to be included in section 2-3 (limited tax liability) of the Norwegian Tax Act. As such, income generated from such activities will be subject to the general rules in the Tax Act. However, the Ministry is indicating that they may re-consider this and introduce special rules at a later stage.

Ultimately, the proposed extended taxing rights can be limited by applicable double tax treaties. If relief is granted, it will depend on the relevant treaty provisions and the geographical application of the treaty.

Some of the treaties Norway has entered do not include the area beyond the territorial sea. In such cases, income from activities on the continental shelf will be taxable in Norway from the first day of operations.

If the treaty, in a geographical sense, also covers the area outside of the territorial sea, the taxing right will normally be limited by the provisions referring to the permanent establishment and business profits (generally included in articles 5 and 7 of the treaties). Under these rules, income from a non-resident will generally only be taxable in Norway if the activities are carried out over a period exceeding six months. However, once that threshold of six months is reached, the income will be taxable in Norway from the first day of operation.

Finally, in a number of Norway’s treaties, a special offshore provision is included. Under these provisions, a permanent establishment is deemed to exist already after 30 days, and income will be taxable in Norway. These provisions may vary in scope and substance. In some of the treaties, the provision explicitly refers to petroleum deposits and, as such, would not capture other activities on the continental shelf. In some of the more recent treaties, however, the offshore provision may also cover other activities connected with the exploration and exploitation of the seabed, subsoil and their natural resources. While it is clear that none of these provisions was negotiated with income from renewable energy, carbon management or mineral activities in mind, it cannot be excluded that at least some of these activities may nonetheless be captured by the wording of the provision.

Regardless of the actual tax liability resulting from the adoption of the proposal, non-residents will be obligated to adhere to registration and notification obligations (i.e., to register with the Tax Authority and the obligation to submit a tax return). An exemption from the obligation to submit a tax return may be applied if an applicable treaty restricts the Norwegian taxing right. However, this is subject to the tax administration’s discretion.

Relevant stakeholders should explore how the proposed new rules will affect their activities. They should take into account annual reporting costs and the possible additional tax costs as a possible result of these rules when considering and pricing undertakings on the Norwegian continental shelf.

Contact:

• Gunvor S. Aakvik, +47 909 45 595.
• Ingebjørg Brekka, +47 952 156 02.
• Lise Ovidia Bruland, +47 986 79 349.