Interest limitation - exception regulations adopted

Rules on the limitation of deductibility in respect of debt interest in communities of interest – exception regulations adopted on 24 April 2014. In connection with the national budget for 2014 new rules were adopted on the limitation of deductibility of interest in respect of interest payable to related parties, with effect from the income year 2014

The main purpose of the rules is to prevent taxpayers from performing adjustments by making high deductions in respect of interest costs in Norway, but with the interest income being subject to low taxation in the related recipient in countries with a lower tax level. The rules also apply to Norwegian group companies, however, even if both interest income and interest deductions are taxed in Norway. The introduction of these rules implies the preclusion of deductions in respect of net interest costs exceeding 30 percent of a specifically determined result.

It is generally only deductions in respect of interest paid to related parties (internal interest) which is intended to be limited. In cases in which a related party has provided security in respect of debt to a non-related party, the interest payable to the non-related party should still be considered as interest paid to a related party. The argumentation for this is that such provision of security could make it possible for taxpayers to raise a higher loan with an independent lender and thereby be able to make a higher interest deduction than an independent company.

In the additional budget from the government, it was stated that the Ministry of Finance would submit for consultation regulations concerning exceptions from the rules on certain types of loans with the provision of security from a related party, in order to limit the number of cases of provision of security causing interest costs to be considered as internal.

Draft regulations have been submitted for consultation. The comments received in the round of consultations have to a great extent been taken into account. The Ministry of Finance has concluded that the exceptions from the new rules should be more comprehensive than those of the proposal submitted for consultation.

In the regulations, determined on 24 April 2014, an exception is provided for cases in which the security is provided by an underlying company of which the borrowing company directly or indirectly owns or controls at least 50 percent. (In the consultation paper, the requirement was direct or indirect ownership of 90 percent or more.)

Also subject to an exception are cases in which a related party has provided shares etc in the borrowing company or a claim against the borrowing company as security. (In the consultation paper, the exception only applied to security in the form of a pledge of shares etc.)

The consultation paper further provided a special exception for negative pledges. This exception has now been removed from the regulations, and with no further mention being made of this removal. In the round of consultations, several of the bodies entitled to comment were of the opinion that negative pledges should not be considered to be security in this context. Although this view has not been expressly taken by the ministry, it is our opinion that negative pledges should not be regarded as security in this context.

In the consultation paper, there were further a number of exceptions from the exceptions. These exceptions provided among other things that if security was provided by a different related company for the benefit of the company actually providing the security for the loan in question (for instance a rent guarantee, which did not concern the security in question), then the exception from the rules would still not apply and the loan would be considered as an internal loan. These exceptions from the exceptions have now been removed from the regulations. This implies that cases in which other related companies have provided security for the company providing security for the loan will still be covered by the exception in the regulations, causing the loan to be considered as an external loan.

Published April 2014

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