Global Tax Alert | 6 February 2017
Norway announces possible changes in interest deduction limitation rules
In a letter to EFTA1 Surveillance Authority (ESA) dated 31 January 2017, the Norwegian Ministry of Finance maintained its position that the interest deduction limitation rules are not contrary to the freedom of establishment under the European Economic Area (EEA) agreement. However, the Ministry nevertheless informed ESA that it is currently reviewing the Norwegian interest deduction limitation rules. The Ministry has suggested extending the scope of the rules to cover interest on external loans, but is also considering the implementation of group ratio rules in order to shield interest on loans which are not linked to profit shifting.
Now it is expected that within the next few months, ESA will decide whether or not to bring the case against Norway to the EFTA Court.
Restriction upon the freedom of establishment
In a reasoned opinion dated 25 October 2016, ESA took the position that the Norwegian interest deduction limitation rules constitute a restriction upon the freedom of establishment as set out in Article 31 of the EEA Agreement.2 ESA identified that the interest cap rules in combination with the group contribution rules favor Norwegian-based companies compared to other EEA based companies, thus creating the alleged prohibited restrictive effect (indirect discrimination in fact).
The Ministry argues that, as long as the alleged restriction is based on the coexistence of the interest deduction limitation rules and the group contribution rules, the special factual and legal context must be taken into account when analyzing whether a domestic and a cross border situation are comparable and – if a restriction exists – when analyzing whether the restrictive rule can be justified by reasons of public interest and whether the rule goes beyond what is necessary to achieve the goal.
If the restriction on the freedom of establishment follows from the group contribution rules, the Ministry considers that a domestic and a cross border situation are not comparable, indicating that debt and equity are two distinctly different forms of financing from an economic point of view and they are also subject to different legal conditions and, thus, the factual and legal differences between these alternatives are substantial.
The Ministry understands that the restrictive effect is found in the territorial limitation of the group contribution rules. However, it is nevertheless of the opinion that such restrictive effect is justified in the need to safeguard the balanced allocation of the power to tax and the need to prevent tax avoidance, cf. C-231/05 Oy AA.
If after taking into consideration the announced changes of the Norwegian interest deduction limitation rules, ESA is still of the view that the rules are contrary to the freedom of establishment, the Ministry of Finance reserves its right to bring forward other objections to the reasoned opinion.
Announced changes to the Norwegian interest deduction limitation rules
The Ministry of Finance is currently preparing a public consultation paper regarding amendments to the interest deduction limitation rules as a part of the upcoming tax reform. The aim is to publish the consultation paper during spring 2017. Hence, changes to the interest deduction limitation rules may be presented in October 2017 in connection with the Government’s proposal of the 2018 state budget. Accordingly, any changes to the rules should enter into force on 1 January 2018 at the earliest.
At this stage the Ministry has announced that the interest deduction limitation rules shall be extended to comprise both internal and external interests. However, the rules should be designed so that they prevent ordinary loans that are not linked to profit shifting arrangements, from being affected by the interest deduction limitation rules. In this regard the Ministry is considering the possibility to include group ratio rules in accordance with Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting recommendations.
According to the OECD a best practice approach is to introduce a group ratio rule alongside the fixed ratio rule. The lack of a group ratio rule/an escape clause was one of the reasons the Norwegian interest limitation rules were considered in breach of the EEA agreement in the first place. The Ministry is evaluating both group ratio rules and equity escape rules.
It should be noted that the Anti-Tax Avoidance Directive (ATAD), which European Union Member States, but not Norway, shall adopt by 31 December 2018, has included group ratio rules as exceptions to the fixed EBITDA (earnings before interest, taxes, depreciation and amortization) rules. The Ministry of Finance will take the provisions of ATAD into consideration when contemplating the changes to the interest deduction limitation rules.
1. The European Free Trade Association.
2. See EY Global Tax Alert, The EFTA Surveillance Authority concludes Norwegian interest deduction limitation rules are contrary to EEA Agreement, dated 27 October 2016.
For additional information with respect to this Alert, please contact the following:
EY Norway, Oslo
- Øyvind Hovland
+47 95 03 98 12
- Anna B. Scapa Passalacqua
+47 91 87 47 46
Ernst & Young LLP, Scandinavian Tax Desk, New York
- Nina S Brodersen
+1 212 773 1727
- Tone Marit Frøland Hagen
+1 929 302 0833
EYG no. 00555-171Gbl