Supplementary regulations on the limitation of the deduction

Supplementary regulations on the limitation of the deduction of interest expenses in communities of interest – the provision of security from related parties.

On Friday 20 December, the Ministry of Finance submitted draft regulations on the limitation of interest deductions in communities of interest – the provision of security from related parties. The aim is for the regulations to be adopted during the course of the first half of 2014, and take effect from 1 January 2014.

The regulations govern cases in which security may be provided from underlying companies / subsidiaries without the loan being considered to be an internal loan.

a. Loans with the provision of security from underlying companies in the same group of companies in case of an ownership share of at least 90 percent

If an underlying company has provided security and the borrowing company holds an ownership share in the underlying company of at least 90 percent, the loan will be considered to be an external loan. The fulfilment of other conditions for the presence of a tax group is not required. There is no requirement that the underlying company should be liable for tax to Norway. Foreign underlying companies may thus provide security for loans without it causing the loan to be regarded as an internal loan, so long as the requirement of the ownership share is fulfilled. The provision of security from or for the benefit of tax-transparent entities and other arrangements may also be covered by the exception.

Indirect ownership, too, may qualify for inclusion under the exception, but only if the company providing the security is an underlying company owned indirectly by the borrowing company by at least 90 percent. The provision of security for the benefit of associated companies etc will not be covered by the exception even if the companies are part of the same group.

b. Loan in cases where the underlying company has given a negative pledge in connection with the loan of the parent company

Negative pledges in underlying companies in which the borrower holds a direct or indirect ownership share cause the loan to be considered to be an external loan. There is no requirement in this regard as to the size of the ownership share. And the provision of security in the form of negative pledges from tax-transparent entities and other arrangements will be covered by the exception.

c. The provision of security in the form of a pledge in ownership shares in borrowing companies

If a related party has put up its shares in the borrowing company as security for a loan, the loan will be considered to be an external loan. This exception applies irrespective of ownership share and type of company.

Security in the form of a pledge in a claim against a related borrowing company is not excepted, however.

Exceptions from the exceptions. Security from other related parties

The ministry has proposed a provision stipulating that neither the exception which applies in the case of the provision of security from underlying companies (litra a) nor the exception which applies in the case of a negative pledge in underlying companies in which the borrower holds a direct or indirect ownership share (litra b) will apply if another related company has provided security for the benefit of the underlying company. The exception also does not apply where the security from another related company has been provided for the benefit of a company in which the underlying company holds a direct or indirect ownership share. This applies irrespective of whether there is a connection between the provision of security from the other related company for the benefit of the subsidiary, or the provision of security from the subsidiary for the benefit of the parent company.

The provision implies for instance that in respect of group account arrangements with a credit limit and provision of security from the companies in a community of interest only the interest on the debt of the parent company to the bank will be considered to be external interest.

The following example has been provided in the consultation paper:

Company A owns 100 percent of company B, and company B owns 100 percent of company C. If company C provides security for the loan of company B from an external lender, the proposed provision concerning an exception from the Tax Act, Section6-41, 6th paragraph, litra a will in the case of a provision of security from the underlying company as a general basis imply that the provision of security from company C does not cause the interest on the external loan to be considered as internal interest in the application of the rule on limitation of interest deductions. If company A has provided security for the benefit of company C, then the exception from the Tax Act, Section6-41, 6th paragraph, litra a still will not apply, causing the interest on the loan to be considered to be internal interest. The reason for this is that the provision of security from company A for the benefit of company C, seen in in context with the provision of security from company C for the benefit of company B, may provide company B with the basis for a loan beyond what company B might have achieved without the provision of security from company C.

Published December 2013

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