Norwegian Supreme Court ruling on calculation of interest deduction

DNB has a branch in New York which receives deposits from customers. The branch pays interest on the customer's deposits. Most of the deposits are transferred from the branch to the head office in Norway, and for US tax purposes a taxable interest income for the branch was calculated on such transferred funds and net interest income for the branch was taxed in the US. 

As a consequence, the branch had internal claims towards the head office, which were recorded as assets in the branch's accounts. In the bank's financial statement, the claims were not included, as the bank's financial statement only included the deposits as such (otherwise the bank's assets would have been overstated and included both the internal claims and the deposits, i.e. double counting). 

Norwegian taxpayers can generally deduct all incurred interest expenses when calculating taxable income. This includes interest expenses incurred in a branch in another country, i.e. the interest expenses incurred on the customer deposits in DNB's New York branch.

However, pursuant to Section 6-19 of the Tax Act, a taxpayer's deduction for debt interest shall be limited if the taxpayer owns real estate, or carries out or participates in activities abroad, and income from such real estate or activities is exempt from taxation in Norway pursuant to an agreement with a foreign state. The reduction method is not based on a direct allocation of debt interest to the associated income, but uses an indirect method based on how the assets in the business are distributed between Norway and the country in question. For taxpayers required to file accounts, such as DNB, the reduction of the interest deduction shall correspond to the ratio between the value of the assets in the branch's business and the value of the taxpayer's total assets based on the book value in the accounts prepared in accordance with the Accounting Act. This can also be expressed as a fraction, where the value of the assets in the branch is the numerator and the value of the total assets is the denominator.

The question was whether "assets" in Section 6-19 of the Tax Act must be understood to include internal claims that a branch of a bank abroad has towards the bank's head office in Norway. The allowed interest deductions would be highest if the internal claims in question were considered not to be assets and therefore held outside of the calculation.

The Supreme Court stated that it is unnatural to refer to a claim against oneself as something one “owns” – as an “asset", and that such claim has no economic value. DNB could not include internal claims in the company as assets on the balance sheet in its annual accounts as they had no economic value for the company. The Supreme Court also found that funds originating from the US branch, and which had been transferred to the head office in Norway, were not excluded from the accounts. These funds were included as assets on DNB's balance sheet, typically as claims from customers after further lending. 

Furthermore, the Supreme Court stated that symmetry considerations could not lead to a broader interpretation of the word "assets" than what was found to clearly follow from the ordinary linguistic understanding of the word "assets" seen in the context of the reference to book value in accounts prepared in accordance with the Accounting Act. The Supreme Court, like the Court of Appeal, thus concluded that the internal claim the branch had towards the head office should not be included as "assets" within the meaning of the provision. Consequently, the claims should not be included in the calculation basis for reducing the interest deduction as the tax office had assumed.

The Supreme Court thus ruled in favour of the taxpayer, which resulted in a reduced tax of in total NOK 1.7 billion for the five years the case concerned. The ruling clarifies the calculation method when applying the reduction rule for interest deductions in accordance with Section 6-91 of the Tax Act.