Generally, hydrocarbon entities have an obligation to ensure the decommissioning of facilities that have outlived their purpose. However, it is expected that as part of the approval process for CO2 storage in the North Sea, entities will be given permission to uphold facilities that will be used in connection with the storage of CO2.
When calculating the taxable income, deductions can be made for costs on the removal of facilities. This is the case when calculating the corporate income tax but also the hydrocarbon tax if the facilities have been used for hydrocarbon extraction. The deduction when calculating the hydrocarbon tax can even be made after the activity has ceased. However, this is not the case if the facilities are built and used for processing third party's hydrocarbon.
In addition, a carry back scheme also applies according to the Hydrocarbon Tax Act, which means that if an unutilised loss remains at the final termination of the hydrocarbon extraction business, the taxpayer can receive a payment equal to the tax value of the part of the unutilised loss that relates to the deductions for removal costs. There is a cap on these payments which equals the total hydrocarbon tax paid.
The new rules mean that entities liable for hydrocarbon tax that conclusively end their hydrocarbon extraction but commence with CO2 storage are given the same opportunity to make deductions for removal costs and also use the carry back scheme, however, with some modifications.
Entities that commence with CO2 storage and remove all facilities that are not used for this purpose, will be able to deduct the costs on the removal of the installations no longer used and apply the carry back scheme according to the Hydrocarbon Tax Act.
Entities that use all the facilities for CO2 storage and later removes all the facilities after end use, will also be able to deduct the costs on the removal of the facilities and apply the carry back scheme according to the Hydrocarbon Tax Act at this later point.
However, the possibility to use the carry back scheme will be phased out through a 20-year period as the amount to be received is lowered by 5% for each year‑end. The 20 years are calculated from the first time when the carry back scheme could be used. Furthermore, the 20 years are calculated from the time when the hydrocarbon extraction conclusively ended if all the facilities were kept for the use of CO2 storage and the carry back scheme could not previously be used. As an example, if the 20 years are calculated from 2030 and the removal of the facilities are ended during 2031 or 2032, but before the year end of 2032, a 5% reduction in the payable amount is relevant.
The new rules means that in some cases the carry back scheme can be used twice – once when hydrocarbon extraction has conclusively ended and not all facilities are used for CO2 storage, and then again when the CO2 storage ends, and the facilities are finally removed.