Proposed changes to the interest deduction limitation rules

Firstly, the term interest in the interest deduction limitation rules is proposed extended also to include costs of financial leasing for lease agreements that must be recognised in the balance sheet according to the Norwegian Accounting Standard (NRS) 14. Secondly, the Ministry proposes to adjust which interest costs that are covered by the EBITDA rule between related parties outside a group. Lastly, it is proposed to adjust which types of group contribution that can be deducted.

The Ministry of Finance estimates that the proposed changes regarding costs of financial leasing will result in an increase of revenue of approximately NOK 30 million. The Ministry believes that the revenue effects of the proposals for regulation of interest to related parties and group contributions in the short term will be fairly limited.

The due date for the public to make statements on the consultation paper is set to 12 July 2023. It is expected that the proposed amendments will be implemented into law, with effect from 1 January 2024.

Background and current law

The purpose of the interest deduction limitation rules is to discourage profit shifting in multinational groups, so that a disproportionately large part of a group's debt is not allocated to Norwegian companies within the group. The rules shall therefore prevent the group from receiving a disproportionately larger part of the group's overall interest deduction in Norway, and thus reduced Norwegian tax costs.

The Ministry argues that rental and leasing agreements have similarities with loan financing in an economical sense. In the same way that multinational groups can allocate a disproportionate amount of debt to Norwegian group companies, such groups can choose to operate with a greater degree of rented and leased operating assets in normal tax countries, such as Norway, and thereby obtain disproportionately high deductions and a low degree of equity financing in such countries. Therefore, the Ministry of Finance believes that the part of rent and leasing payments which in an economic sense corresponds to interest costs, should be covered by the interest deduction limitation rules in the same way as ordinary interest costs.

Proposal

The Ministry proposes in the consultation paper that it will become relevant to calculate an interest element for lease agreements where the lease object must be recognised in the balance sheet and deducted in the income statement as depreciation and interest costs, either the taxpayer uses NRS 14 or IFRS 16 as the accounting standard.

It is further proposed that the part of the leasing cost that is to be considered interest costs, shall be the interest as in the company's submitted income statement, if the calculation of the interest is in line with NRS 14. Therefore, where there is a discrepancy between the interest element in the submitted financial statements and what can be determined as the interest element according to NRS 14, a new assessment and calculation of interest must be made in accordance with the principles in NRS 14. This will also apply regardless of whether the taxpayer is subject to the exception for small enterprises – as long as the company exceeds the proposed threshold of NOK 1 million in total leasing costs from financial leasing agreements in the tax year.

The Ministry has considered whether the general rules for taxable ownership also should be amended, in order to coincide with the proposed rules for when the interest element is to be calculated in financial leasing according to the interest deduction limitation rules. The Ministry has concluded in the consultation paper that it is not desirable to put forward such a proposal at this time. However, they ask for input from the consultation bodies on this topic.

Background and current law

Under certain circumstances, a group company that invokes the exception rule, or where total net interest costs for the Norwegian part of the group is below the annual threshold amount of NOK 25 million, can still have net interest costs to related parties outside the same group cut-off according to the EBITDA rule. In the Ministry's opinion, this cut-off has been circumvented by moving debts to related lenders outside the group, to an intermediate company that lies between the creditor company and the related lender. The intermediate company will not have interest costs and thus will not get limited interest deduction according to the interest deduction limitation rules.

Proposal

It is proposed by the Ministry that interest costs to group companies shall be considered as interest costs to related parties outside the same group, if the recipient of the interest payment is a Norwegian group company that has interest costs to related parties outside the group. The amount of such reclassification of interest costs shall be limited to the recipient's interest cost to related parties outside the group. As loans from related parties outside the group can be granted through several companies in a company structure, one must therefore map all loans from related parties both outside and within the group.

Background and current law

The deduction limit in the interest deduction limitation rules is calculated as 25% of EBITDA (for tax purposes), i.e., ordinary income plus net interest costs and tax depreciation. Received group contributions with tax effect increase the deduction limit, while paid group contributions reduce the deduction limit.

However, in accordance with the Tax Act Section 6-41 third paragraph, group contributions from companies that use the balance sheet-based exception rule in Section 6-41 eighth paragraph, shall not be included when calculating the deduction limit. The purpose of such deductions is to avoid that companies using the exception rule renounce deduction capacity by way of group contributions. This rule can be circumvented by group contributions being made from a company that uses the exception rule to a company that does not use the exception rule, via a third company that does not use the exception rule.

Proposal

The Ministry proposes that the ultimate recipient of group contributions made by companies that use the balance sheet-based exception rule cannot include the group contribution when calculating the deduction limit. Group contributions will be considered to have been received from a company that uses the exception rule, if the transferring company has received group contributions from a company that uses the exception rule – limited to the amount of group contribution received by the transferring company from a company that uses the exception rule.