Norway is about to introduce withholding tax on interest, royalties, and certain lease payments.
On October 7, 2020, the Norwegian Government presented its national budget for 2021, including several changes to the tax rules in Norway.
One issue relevant for multinationals with activities in Norway is the proposed introduction of withholding tax on interest, royalties, and certain lease payments.
As per today Norway has no domestic right in the tax law to levy such withholding tax. The proposal is that this tax at a rate of 15% on gross payment will be introduces with effect as from July 1, 2021.
However, the tax will only be triggered if the payment is made to a related group company resident in a low tax jurisdiction.
Payments to group companies in low-tax countries
The proposed withholding tax will be triggered whether it is a Norwegian incorporated corporation or a Norwegian branch of a non- Norwegian entity that is the payor.
However, the withholding tax will apply only on payments made to «related group companies». This includes enterprises that are directly or indirectly owned or controlled by at least 50%.
Furthermore, the proposal applies only to payments to enterprises resident in «low-tax countries». Norwegian law defines low-tax country as a jurisdiction where the effective tax level is below 2/3 of the Norwegian tax level for similar activities. Since the regular Norwegian corporation tax rate is 22%, the low tax country threshold means an effective tax rate of less than 14.67%. However, the threshold is 16.67 % for financial undertakings which in Norway are taxed at a rate of 25%.
When the payment is made to enterprises resident in low-tax countries in the EU / EEA, withholding tax shall not be levied if the recipient is genuinely established there.
Interest, royalties and rent payments
The term «interest» corresponds to the general understanding of interest in Norwegian tax law. However, the withholding tax shall also be levied on the interest element in financial leasing contracts.
It has not been proposed to include an exhaustive definition of the term «royalty». According to the proposal, royalty is «remuneration for the use of or the right to use intellectual property rights». This includes copyrights and patent rights. In addition, the definition included in Article 12 of the OECD Model Tax Convention will provide guidance.
Finally, the withholding tax shall apply to “lease payments” for certain assets. This particularly applies to larger operating assets such as drilling rigs, ships, etc. that are leased on «bareboat» contracts and aircraft, helicopters, etc. that are leased on «dry leasing» terms.
Implementation of the tax deduction
It is the Norwegian entity making the payment that will be responsible for deducting withholding tax. The tax deducting entity is required to send a report of the withholding tax, probably within seven days after the withholding has been made. The tax deducting entity may correct errors by submitting a correction report within three years of the ordinary report.
The foreign recipient, who is the subject of the withholding tax, will not be required to file a tax return to Norway. However, if the deduction was too high, the recipient will be entitled to claim a refund within three years after the end of the year for which the withholding tax was levied.
See our website: Corporate tax in Norway
Magnus Legal comments
A withholding tax rate of 15% of the gross amount must be considered as a high tax rate that can easily exceed the recipient's gross margin. The reason given for the high rate is partly that it gives Norway a room for negotiation when concluding tax agreements with other states.
However, Norway has already entered into tax treaties with around 90 jurisdictions. In many of these treaties, Norway will be prevented from imposing withholding tax, and in the treties where Norway retains such a right, the withholding tax rate will often be reduced below 15%.
Our recommendation is that all group entities making interest, royalty or rent payments to other group companies, review the contract and make the necessary adjustments.
Please do not hesitate to contact us if you have any queries regarding the above.