The EFTA Surveillance Authority (ESA) has in a reasoned opinion concluded that certain interest cap rules contained in the Norwegian Tax Act are not in line with Article 31 of the EEA Agreement regarding freedom of establishment.

ESA is of the opinion that the interest cap rules are indirectly discriminatory. Although the rules in principle apply equally to domestic groups and cross-border groups, ESA finds it unlikely that they apply to loans within a Norwegian group in practice. As a consequence, cross-border groups find themselves at a disadvantage, which, in ESA’s view, amounts to an infringement of the freedom of establishment protected by the EEA Agreement.

ESA’s conclusion will affect companies with cross-border activities in Norway and another EEA state. The interest deductibility for these companies may have become more limited than is lawful, with right to claim for a tax refund as a likely consequence.

ESA emphasises that Norwegian companies within a tax group may use group contributions between the companies rather than establishing internal loans, and thus prevent the deduction of interest on loans from being limited. Alternatively, Norwegian companies can use group contributions to adjust the deduction limit.

Foreign companies do not have the same opportunity to avoid the limitation of interest deduction since they are not in a position to give or receive group contributions with effect for tax purposes. Norwegian and foreign companies are thus not treated equally, and this may lead to harder Norwegian taxation on foreign group companies than Norwegian group companies. As a result, groups may be inclined to avoid establishing companies abroad or Norwegian companies may avoid having a foreign branch. Thus, the rules may make it less attractive to establish a foreign company or branch, which is contrary to the principle of freedom of establishment under the EEA Agreement.

ESA states that although the Norwegian interest cap rules appear to be the same as for foreign companies, they in practice entail that Norwegian companies can make arrangements, which are not available to foreign companies, to avoid limitation of interest deductibility. This constitutes indirect discrimination and illegal unequal treatment.

ESA is not disputing that the Norwegian legislation pursues legitimate objectives aimed at maintaining the balanced allocation of taxing powers between EEA States and the prevention of tax avoidance and abuse. However, the Norwegian rules go beyond what is necessary to achieve this goal, since they are not limited to preventing only artificial arrangements created to avoid tax.

By adoption of the reasoned opinion, ESA asks the Norwegian Ministry of Finance to, within two months, make necessary measures to rectify what ESA sees as an unfair and unjustified distinction between Norwegian and foreign group companies. If this is not done, ESA may file a claim to the EFTA Court of Justice after which legal proceedings will follow to resolve the issue. It remains to be seen how the Ministry of Finance will comply with ESA’s decision. On this basis, we expect that the interest cap rules may be amended in the near future.

Link to press release sent from ESA on 25 October 2016.

Link to ESA’s statement.