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Hearing Proposal for the introduction of withholding tax on interest and royalty payments

The Norwegian Ministry of Finance released yesterday a proposal for the introduction of 15% withholding tax on interest, royalty payments and leasing in the Norwegian Tax Act. This is now part of a public hearing open for written submissions.

Hands

Only payments to related parties

Currently Norway applies (up to 25%) withholding tax only on payment of dividends from Norwegian resident companies to foreign resident shareholders. Based on the proposal, Norway will introduce (up to) 15% withholding tax on interest and royalty payments from a Norwegian to a foreign resident company provided the foreign company is a related party". A party shall be deemed related if there 50% more directly or indirectly joint ownership with the payor.

Withholding tax on interest only if recipient in low tax country

The stated primary objective is to prevent erosion of the Norwegian tax basis by way of cross border payments. For interest payments, the withholding tax is limited to recipients based in low tax countries, i.e. countries with an effective tax rate of less than 2/3 of the comparable Norwegian tax rate. The background for this special limitation for withholding tax on interest is that Norway already has introduced special limitations on the tax deductibility of interest payments.

Withholding tax on royalty and lease payments?

Royalty is payment for the use of intellectual property. However, in international tax practice, many countries have, with the acceptance of OECD guidelines, extended the definition of royalty payments to include payments for "the use of commercial or industrial equipment", or similar definitions as provided under relevant domestic law.

The hearing proposal discusses to introduce lease payments typically for such as drilling rigs, vessels, FPSOs/FSOs.

EU/EEA exemptions

A withholding tax must be in line with the fundamental freedoms of EU law. The proposal entails that beneficial recipients of royalty and interest payments genuinely resident within EU/EEA, may choose between accepting a gross based withholding tax or, alternatively, elect to file a full tax return based on deducting any relevant costs incurred in order to earn the royalty/interest earned.

Tax treaties

A number of Norway's tax treaties limits the rate of withholding tax on interest and/or royalty to a rate lower than 15%, in many cases down to zero. Such tax treaties will have to be re-negotiated before a new withholding tax can become effective.

Effective date

According to the hearing proposal, the new withholding tax on both interest and royalty payments shall become effective on payments made after 1.1.2021. No grandfathering is proposed for existing loans, license or lease agreements.

Hearing period

The time limit for submitting remarks to the draft is the 27th of May 2020.