The Supreme Court: Norwegian management does not give non-resident companies a tax liability to Norway

The judgment provides important clarifications with regards to the requirements for a non-resident taxpayer to have a limited tax liability to Norway for activities on the Norwegian continental shelf.

In short; Odfjell Rig Ltd., a company registered and resident in Bermuda, had a 53% ownership of Deep Sea Drilling Company II KS (hereinafter referred to as the Owner Company). The Owner Company owned a rig (Deep Sea Bergen) that was leased out on bareboat terms to a Norwegian operating company. The operating company used the rig to fulfil a drilling contract with Statoil on the Norwegian continental shelf. The management of the rig was outsourced to Odfjell Drilling AS. The main issue of the case was whether Odfjell Rig Ltd, through its ownership interests in the Owner Company, had a limited tax liability to Norway for the income from leasing out the rig, i.e. if the leasing business should be considered operated from Norway.

The state argued that Odfjell Rig Ltd. was liable to pay tax to Norway pursuant to the Norwegian Tax Act section 2-3 (1) (b) which, inter alia, states that a non-resident taxpayer becomes liable to tax to Norway for income from activities he operates or participates in that are operated or managed from Norway. The state was of the opinion that Odfjell Rig Ltd. through its ownership in the Owner Company, and because many of the company's functions was outsourced to Odfjell Drilling AS, had to be considered as operating its business in Norway.

Odfjell Rig Ltd. contested that the company had a tax liability to Norway. It was argued that the decision to lease out the rig was made by the partners' meeting in the Owner Company abroad. The services provided by the Norwegian management company should be regarded as support functions, and could not cause the Owner Company's business to be regarded as operated from Norway.

The Supreme Court majority (dissent 4-1) was in support of Odfjell Rig Ltd. The Supreme Court stated (paragraph 66 of the judgment) that the Owner Company's business consisted of leasing out capital intensive operating equipment for a significant rental fee. The court emphasised that the actual leasing of the rig – i.e. making the rig available for the lessee – both formally and in reality was decided and carried out by the partners' meeting abroad, and not by the management company in Norway. Furthermore, the court stated that the functions that the Norwegian management company performed had to be regarded as support functions for the Owner Company for the implementation of the bareboat contract, and that these functions were limited in scope and of very limited value. First voting justice concludes (Wiersholm translation):

Accordingly, the compensation is not primarily rooted in the accomplishments performed within the borders of this country. The requirement for a primary connection between the contract compensation and the operation performed in Norway is therefore not fulfilled. This assessment is not changed by the fact that the support functions are necessary for the contractual relations to be accomplished.

The conclusion is that the bareboat leasing business of the Owner Company, in which Odfjell Rig Ltd. had an ownership interest, is not operated from Norway in a way that created a tax liability to Norway. The tax authorities' decision was consequently revoked.

The Supreme Court's clarification in this case is important, as it is stated that a rig- owning company that conducts its leasing business from abroad is not taxable in Norway, even if the rig is leased out on bareboat conditions to an operating company on the Norwegian continental shelf and the management functions are handled by a Norwegian management company.

The Supreme Court delivered its judgment on 14 December 2015. The ruling can be read in its entirety here (in Norwegian only).