The Norwegian Ministry of Finance issued a discussion paper that proposes changes to the earnings stripping rules.
In brief, the proposal in the discussion paper (dated 4 May 2017) aims at expanding the earnings stripping rules to include interest paid to unrelated parties. The proposed rules would only apply with respect to entities that are part of a consolidated group (which is in line with a cross-political party agreement made by Parliament in 2016).
A “safety valve” is included in the proposal, based on the group’s equity ratio. These rules are technically complicated and would require significant compliance and reporting.
The deadline for submitting comments to the discussion draft is 3 August 2017.
The earnings stripping rules were introduced in 2014, limiting the deductibility of interest paid to related parties that exceeds 25% of tax EBITDA* (30% prior to an amendment made in 2016). The rules are not applicable when net interest costs do not exceed NOK 5 million (approximately €529,000).
*Earnings before interest, tax, depreciation and amortization
The Ministry of Finance issued the May 2017 discussion draft, proposing amendments to these rules. The proposed changes, if passed, have the potential to limit the rights of group companies to deduct interest costs. Under the proposed rules, interest paid to unrelated parties would also be subject to the earnings stripping rules. An exception has been proposed, ostensibly so that loans made in the ordinary course of business are not caught by the earnings stripping rules.
What is regarded as a “group” would be closely linked to the consolidation rules under IFRS, unless the Norwegian part of the group is already part of a consolidated financial statement. Tax professionals in Norway expect that this part of the proposal may cause uncertainty for taxpayers. In addition, the comparison of the equity level requires adjustments of the financial statements both at Norwegian level and at the consolidated level. These rules are technically complicated and may require extensive additional work and documentation.
The Ministry of Finance proposes that the earnings striping rules be extended to include interest on loans from unrelated parties, but only for companies that are part of a consolidated group. The reason for the proposal is the desire to prevent multinationals from shifting profits out of Norway to more beneficial tax jurisdictions.
The proposal means that the deductibility of interest costs—interest paid to both to related and unrelated parties—may be limited for group companies that have net interest costs exceeding 25% of tax EBITDA.
The rules would primarily be applicable when the group prepares consolidated financial statements that include the company in question. However, the rules would also apply for companies that could be included in the consolidated financial statements under IFRS. This implies that complex assessments required under IFRS would become part of Norwegian tax law, which could potentially lead to prolonged and expensive tax disputes.
In the discussion draft, the Ministry of Finance stated that its aim is to find an appropriate definition that can work as an effective tax planning deterrent and that, at the same time, is administratively manageable. The Ministry of Finance indicates that the proposed rules may be adjusted based on responses in the consultation.
An exception would apply to the proposed rules if the equity ratio is equal to or greater than the group ratio. The exception would apply to companies that are included in a consolidated financial statement prepared under NGAAP, IFRS or the accounting rules in another EEA Member State.
The starting point for the assessment of the equity ratio is the consolidated financial statement(s) and the accounts of the company.
Taxpayers could fully deduct interest costs if able to document that the equity ratio of the company is not lower than the equity ratio reported in the consolidated financial statement. Alternatively, this calculation could be made collectively for all Norwegian group companies. Under such circumstances, the Ministry of Finance assumes that no profit shifting takes place.
Based on the wording of the proposal, the equity ratio must correspond to or be greater than that of the group. "Correspond to" means that it must be equal to, but a deviation of 2% would be acceptable.
If a company claims full deductions based on the exception as a single company, the financial statements of that company would have to be revised, and be based on the same accounting principles as those of the consolidated financial statements. The proposal includes certain adjustments that would have to be made to the accounts—both at the company level and at the consolidated level to determine that the equity ratio is comparable.
Specific provisions for consolidation apply if the calculation is carried out at the group level. If multinational enterprises have both Norwegian sub-groups and companies that are separate from the Norwegian sub-groups, the calculations for the companies would have to be prepared on a company level. For Norwegian sub-groups, a consolidated balance sheet would have to be prepared for each sub-group. Thereafter, the balance sheets would need to be summarized to show a weighted average.
The consolidated balance sheet would have to be prepared under the accounting principles that apply for the consolidated financial statements. The discussion draft proposes several adjustments that would apply for the consolidation (for example income increases and deductions for goodwill).
Under the proposal, claiming deductions under the exception could result in comprehensive filing and documentation obligations. First, it would require that an auditor would have to confirm all amended accounts. This includes any adjustments to the balance sheet required under the proposed provisions. Second, the consolidated financial statements would have to be confirmed by an auditor. If no consolidated financial statement has been prepared, consolidated financial statements that include all Norwegian entities must have to be prepared and confirmed by an auditor.
All relevant amounts would have to be stated in a separate form filed as an attachment to the tax returns. This would need to detail all necessary adjustments made in the accounts and must be signed by an auditor.
The cost of claiming deductions under the exception to the equity ratio exception, thus, could be expected to be quite high. The Ministry of Finance therefore has propose that the threshold for applying the rules for groups would be set at NOK 10 million.
Under the current rules, unused interest deductions that are carried forward cannot be used—even if the total amount of the net current year interest costs and the carryforward is below the threshold amount. The Ministry of Finance proposes to repeal this limitation.
The Ministry of Finance proposes that the amendments would be effective beginning from 1 January 2018.
For more information, contact a tax professional with the KPMG member firm in Norway:
Per Daniel Nyberg | + 47 40 63 92 65 | firstname.lastname@example.org
Thor Leegaard | +47 40 63 91 83 | email@example.com
Pål-Martin Schreiner | +47 40 63 45 26 | firstname.lastname@example.org
Marius Aanstad | +47 40 63 95 51 | email@example.com
Fredrik Klebo-Espe | +47 47 64 07 70 | firstname.lastname@example.org
© 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.