Global Tax Alert | 27 October 2016

The EFTA Surveillance Authority concludes Norwegian interest deduction limitation rules are contrary to EEA Agreement

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Executive summary

On 25 October 2016, the EFTA1 Surveillance Authority (ESA) issued its reasoned opinion in the infringement procedure against Norway, concluding that the Norwegian interest deduction limitation rules are contrary to the freedom of establishment under the European Economic Area (EEA) agreement.

The Norwegian Ministry of Finance is required to make the necessary amendments to the rules so that such rules are not considered as indirectly discriminatory. If such measures are not taken within two months, ESA will be able to submit the case to the EFTA Court.

Accordingly, it is likely that the Norwegian interest deduction limitation rules will be amended before the end of 2016.

Detailed discussion

ESA has taken the position that the Norwegian interest deduction limitation rules constitute a restriction upon the freedom of establishment. If the rules are not amended and ESA takes this case to the EFTA Court, the outcome of this procedure is likely to have a significant impact for European Union (EU) parent companies with affiliated entities in Norway and Norwegian companies with EEA-based branches.

Although the rules de jure treat identically cross border and purely domestic situations, they are de facto very unlikely to apply to Norwegian based groups, which – provided that the Norwegian parent company owns or controls more than 90% of the shares/voting power of its Norwegian subsidiary – are entitled to grant each other group contributions for tax consolidation purposes.

The application of the Norwegian interest deduction limitation rules together with the group contribution rules creates in practice a less favorable treatment applicable to groups with cross border operations within the EEA, as compared to the treatment applicable to Norwegian based groups.

In its assessment of whether the restriction may be justified, ESA emphasizes that national legislation, such as the interest deduction limitation rules, that has the purpose of preventing tax-avoidance must be construed to prevent only wholly artificial arrangements created with a tax avoidance purpose.

ESA then mentions that, under the Norwegian rules, interest payments will not be deductible if they exceed for any reason the limit set in the rules. The rules do not include any form of escape clause. Hence, arrangements do not have to be artificial to be caught by the Norwegian rules. Finally, ESA states that the Anti-Tax Avoidance Directive (ATAD) only sets out minimum standards which all EU member states must implement, which implies that any national measure, including interest deduction limitation rules, will still need to comply with the fundamental freedoms in order to comply with the EEA agreement. Any rules that are stricter than the provisions of the ATAD can only exist in harmony with the fundamental freedoms.

If ESA’s position is confirmed by the EFTA Court, taxpayers affected by the interest deduction limitation rules will be considered as being subject to an illegal restriction of their right to deduct interest expenses. Consequently, taxpayers should assess whether to request a reassessment of the filing position for the income years 2014 and 2015 by submitting a request for amendment of their tax returns.


1. European Free Trade Association.

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
  • Anthon Søegaard
    +47 90 36 64 76
Ernst & Young LLP, Scandinavian Tax Desk, New York
  • Nina S Brodersen
    +1 212 773 1727
  • Tone Marit Froland Hagen
    +1 212 773 3694

EYG no. 03583-161Gbl