Norway – 2019 S1

Norway
Branch reporters
Anna B. Scapa Passalacqua1
Lars Andreas Henie2

Summary and conclusions

Norway introduced interest cap rules for interest on loans between related parties with effect from 1
January 2014. Under these rules, the deduction of interest expenses is limited to 25% of the taxable
EBITDA. As a main rule, only interest on loans between related parties are covered by the rules.
There is a minimum threshold for the application of the rules of NOK five million. Disallowed interest
expenses may be carried forward for a period of ten years.

The BEPS Action 4 report recommends a wider definition of interest than what is currently regarded
as interest under the Norwegian interest cap rules. This applies e.g. to the finance cost element of
finance lease payments and capitalised interest included in the balance sheet value of a related
asset.

In addition to the interest cap rules, the deduction of interest expenses may also be limited under
the application of the Norwegian arm’s length rule codified in article 13-1 of the Tax Code or the
application of the Norwegian GAAR. The interplay between the different set of rules is not entirely
clear.

On 8 October 2018, the government issued a proposal for new interest cap rules in Norway.
According to this proposal, for companies that are (or can be) part of a consolidated group for
financial accounting purposes, the interest cap rules will apply to loans from both related and
unrelated parties. For companies that are not part of a group as defined in the proposal, the existing
interest cap rules will not be changed. This will imply that there will be a dual set of interest cap
rules.
The proposal does not alter the definition of interest or the current EBITDA ratio which is proposed
to be maintained at 25%. However, the minimum threshold is proposed to be increased to NOK 25
million at group level. The new rules are intended to come into force with effect from 2019.

Two alternative equity escape rules are proposed. These entail that a company may claim full
deductions for all net interest cost if (i) the company’s equity to total assets ratio is equal to or higher
than that of the group`s consolidated balance sheet, or (ii) if the Norwegian group companies’ equity
to total assets ratio is equal to or higher than that of the group`s consolidated balance sheet. The
equity escape rules are optional, and the taxpayer may also choose the one which is more beneficial.

The new rules imply that there will be a difference in treatment between groups consisting of
Norwegian companies only and international groups. For groups with only Norwegian companies the
debt to equity ratio will always be equal to the ratio in the group`s consolidated balance sheet and
the equity escape rule will apply without any further requirements.

It is expected that the application of the rules will impose a significant administrative burden on both
the taxpayers and the tax administration. The complexity of the rules in combination with
burdensome administrative and documentation requirements create a risk that multinational groups
will deter from invoking the equity escape rules based on a cost/benefit assessment.

1
Associate Partner, EY Norway.
2
Head of Group Tax, Statkraft AS.

1
Norway – 2019 S1

The implementation of the interest cap rules in Norway has been influenced by the freedoms under
the Agreement of the European Economic Area (EEA Agreement). The EFTA Surveillance Authority
(ESA) issued a reasoned opinion against Norway on 25 October 2016 concluding that the Norwegian
interest cap rules are contrary to the freedom of establishment under the EEA Agreement. ESA has
requested the Ministry of Finance to make the necessary amendments to the rules in order for the
rules not to be considered as indirectly discriminatory. The proposal for new rules was issued on 8
October 2018 and the issue of the compatibility with the EEA Agreement is still under debate.

Norway has not implemented any specific domestic rules addressing corresponding reduction in case
a foreign jurisdiction limits deductions with respect to interest that the foreign borrower pays to a
Norwegian lender. Thus, the interest income is still fully taxable under domestic law.

Whether Norway may be required to make a corresponding adjustment based on the application of a
relevant treaty depends on whether the primary adjustment is a result of the application of a
transfer pricing rule, which falls within the scope of application of article 9 (1) of the relevant tax
treaty. It may be argued that interest cap rules fall outside the scope of article 9, as their purpose is
not to assimilate the profits to an amount corresponding to the profits on an arm’s length situation.
Instead, the rules are targeted at profit shifting between high tax and low tax jurisdictions. Thus, this
type of rules may be considered outside the scope of article 9 and, thus, the corresponding
adjustment obligation or MAP is not available for resolving cases of double taxation.

Norway has signed the Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent Base Erosion and Profit Shifting (the MLI), but it has not yet been ratified. Norway has
chosen to implement article 9 (2) of the OECD Model Tax Convention (MTC) to its covered tax
agreements through article 17 (2) of the MLI. This would apply only if both contracting states decide
to amend the same treaty through the MLI and do not make a reservation to the application of
article 17.

Part One: General rules regarding interest deductibility

1.1. General overview

Under Norwegian law, interest expenses are as a main rule deductible in determining taxable
income.3 This rule has a broad scope and applies even on debt assumed to finance expenses not
related to an income generating activity. Moreover, deductibility is also granted when interest is
incurred on debt that is assumed in order to finance investments where the income derived from the
investment is tax exempt.

From the main rule regarding deductibility of interest expenses, there are several important
exceptions. Norway introduced interest limitation rules (“interest cap rules”) for interest on loans
between related parties with effect from 1 January 2014. Under these rules, the deduction of
interest expenses is limited to 25% of the taxable EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortisation). These rules were enacted before the 2015 OECD BEPS Action 4
report4 which was updated in 20165 (“BEPS Action 4 report”), and are still in force.

In addition to the interest cap rules, the deduction of interest expenses may also, before and after
the BEPS Action 4 report, be limited under the application of the Norwegian arm’s length rule

3
Tax Code (Lov om skatt av formue og inntekt), Law No. 14 of 26 March 1999, art. 6-40 (1).
4
OECD, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 -
2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project (Paris, OECD Publishing, 2015).
5
OECD, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 -2016
Update: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project (Paris: OECD
Publishing, 2017).

2
Norway – 2019 S1

codified in article 13-1 of the Tax Code, the application of the Norwegian GAAR (General Anti-
Avoidance Rule) or based on certain other specific provisions in the Tax Code.

Norway treats debt and equity differently for tax purposes. Interest expenses are as a main rule tax
deductible and interest income is taxable as general income at the current rate of 23%.6 By contrast,
dividends are not tax deductible for the distributing company and are taxable under the shareholder
model for individual shareholders (with a cost of capital allowance). An exemption system applies to
dividends received by Norwegian corporate shareholders. In 2013, the Norwegian government
appointed an expert committee (“Scheel committee”) to review the Norwegian corporate tax system
in light of international developments. The Scheel committee delivered its report on 2 December
2014.7 The committee examined, inter alia, the possibility of protecting the Norwegian corporate tax
base by treating debt and equity equally, either by removing the right to deduct interest expenses
from corporate tax (referred to as Comprehensive Business Income Tax - CBIT), or by granting
companies deductions for the alternative return on equity (referred to as Allowance for Corporate
Equity - ACE). The Scheel committee concluded that it was not recommendable to change the
fundamental principles of the Norwegian tax system where interest and dividends are treated
differently for tax purposes. The conclusion was confirmed by the government in a later report to the
parliament.8 However, the Scheel committee recommended to amend the interest cap rules in
several aspects, e.g. also to apply to interest on external debt and the government issued a proposal
for a new set of interest cap rules on 8 October 2018.9

While interest expenses, as a main rule, are deductible, interest income is taxable for the creditor as
benefit gained from capital and/or business activities. Norway does not levy withholding tax on
interest payments. However, the Scheel committee proposed to introduce such withholding tax in
order to mitigate profit shifting leading to erosion of the Norwegian tax base and the Ministry of
Finance is currently working on a proposal to introduce withholding tax on interest payments to
foreign lenders.

1.2. Definition of “interest”

The Tax Code does not contain a general definition of what is to be considered as interest.
Furthermore, the preparatory works to the Tax Code also provide limited guidance on which costs
should be considered more specifically as interest for Norwegian tax purposes. However, based on
judicial and administrative practice, interest is in general compensation to the lender for a credit or
loan granted to the borrower.

In principle, only payments to a lender are to be considered as interest. However, payments to other
than a lender are to be considered as interest if the costs are connected to the loan and equals the
higher interest that otherwise would have been imposed on the loan without these costs incurred.
This applies for instance to guarantee fees paid to other than the lender.10

Whether the payment is denominated as interest or something else is not decisive as long as the cost
is compensation to a lender for a credit or loan granted to a borrower. Thus, the decisive factor is in
principle the economic substance of the payment. 11

6
The government has proposed to reduce the rate to 22% from 2019 in the state budget for 2019.
7
Report from the tax committee, NOU 2014:3, Kapitalbeskatning i en internasjonal økonomi.
8
Report to the parliament from the Ministry of Finance, Meld.St. 4 (2015-2016), p. 46.
9
Governmental proposal to the parliament from the Ministry of Finance, Prp. No 1 LS (2018-2019).
10
Position paper from the Tax Directorate dated 15 March 2016, Dommer, uttalelser, m.v. i skattesaker, Utv
2016, p. 851.
11
F. Zimmer, Lærebok i skatterett, 7nd ed. (Oslo: Universitetsforlaget, 2014), p. 220.

3
Norway – 2019 S1

The term “interest” in general designates income from debt claims of every kind, both money lent
and money outstanding including both ordinary interest and late interest. When loans are issued at
discount, the original issue discount is treated as interest. It does not matter whether there is a
variable, floating or fixed interest rate, or whether the claim is secured by a mortgage or carrying a
right to participate in profits. Also index-tied charges on bonds are considered as interest12 as well as
manufactured interest on stock lending.13 Furthermore, commission and fees paid to the lender for
providing the loan or maintaining the loan are regarded as interest.14

Currency fluctuations on loans, receivables and derivatives are not considered as interest. The same
applies to the interest element on financial leasing payments.15 Also, gains and losses on interest
derivatives are not considered as interest.

The distinction between interest and other financial payments is important in order to determine
which costs are deductible for tax purposes. Costs that are not considered as interest are only
deductible if they are incurred in order to acquire, secure or maintain taxable income.16 The
distinction is also important to determine the scope of application for the interest cap rules which
make a reference to the general scope of interest expenses that are otherwise deductible according
to the Tax Code.17

Certain costs that are otherwise considered as interest are excluded from the concept of interest for
the purpose of applying the interest cap rules. According to the preparatory works, this applies to
amortisation of capitalised interest included in the balance sheet value of a related asset. Under
Norwegian law it is optional to capitalise interest on debt assumed when constructing buildings or
fixed assets and amortise the interest together with the related building/asset. If the taxpayer elects
this option, the interest expenses are excluded from the scope of application of the interest cap
rules.18

When loans are issued at a discount or premium, the original issue discount or premium is treated as
interest when the loan is redeemed or sold for the first time in the secondary market, but not for the
acquirer of the loan in the secondary market.19 Also, there are certain clarifications made regarding
the concept of interest under the interest cap rules in relation to composite bonds.20

The BEPS Action 4 report does not recommend a definition of interest to be used by all countries for
all tax purposes. Rather, the report provides recommendations for the concept of interest under a
best practice rule to address base erosion and profit shifting using interest expenses. According to
the BEPS Action 4 report such a best practice rule should apply to: (i) interest on all forms of debt; (ii)
payments economically equivalent to interest; and (iii) expenses incurred in connection with the
raising of finance.21

It might be argued that the BEPS Action 4 report under the best practice approach recommends a
wider definition of interest than what is currently regarded as interest under the Norwegian interest
12
Position letter from the Ministry of Finance, Dommer, uttalelser, m.v. i skattesaker, Utv 1998, p. 1054.
13
Tax Code art. 6-40 (7).
14
Supra n. 10.
15
Skattedirektoratet, Skatte-ABC 2018, https://www.skatteetaten.no/en/rettskilder/type/handboker/skatte-
abc/2018/renter-av-gjeld/R-12.037/R-12.074/ (accessed 15 October 2018).
16
Tax Code art. 6-1 (1).
17
The interest cap rules refer in the Tax Code art. 6-41 (2) to the general scope of interest expenses in the Tax
Code art. 6-40.
18
Governmental proposal to the parliament from the Ministry of Finance, Prp. No 1 LS (2013-2014), p. 114.
19
Tax Code art. 6-41 (2).
20
Tax Code art. 6-41 (2).
21
Supra n. 5, p. 33.

4
Norway – 2019 S1

cap rules. In particular, expenses incurred to other than the lender in connection with the raising of
finance are only to be considered as interest in Norway if the costs are connected to the loan and
equal the higher interest that otherwise would have been imposed on the loan without these costs
incurred i.e. the payment must substitute interest. Although, the BEPS Action 4 report does not
discuss this issue specifically, the best practice approach does not seem to contain a similar
reservation as under the Norwegian rules. Furthermore, several of the examples listed in the BEPS
Action 4 report seem to include financial payments which are not considered as interest under the
Norwegian rule. This applies e.g. to the finance cost element of finance lease payments.22 The BEPS
Action 4 report also specifically mentions that capitalised interest included in the balance sheet value
of a related asset or the amortisation of such interest should be considered as interest expenses
under a best practice approach. As mentioned, such capitalised interest is excluded from the scope
of application of the Norwegian interest cap rules.

1.3. Interest deductibility

The starting point under Norwegian law is that interest, as a main rule, is tax deductible. There is no
requirement that the interest is incurred in order to generate taxable income. Thus, interest is
deductible irrespective of whether the interest is connected to an income generating activity or not.
This is a deviation from the main rule of deductibility under Norwegian law which determines that
only costs incurred in order to acquire, secure or maintain taxable income are deductible.23

A general requirement for deductibility of interest expenses which may be inferred from the wording
of the Tax Code, is that the taxpayer must be personally liable for the debt.24 In case several
taxpayers are jointly liable for the debt, each taxpayer will only be granted deduction for interest
expenses according to the internal agreement between the parties.

The main rule under Norwegian law that all interest expenses are deductible in determining taxable
income has been modified by some specific provisions in the Tax Code. For example, interest on
certain tax claims as well as interest on certain equity certificates issued by savings banks are not
deductible.25

Norway has adopted special tax regimes for shipping, petroleum and hydropower. Under these
special tax regimes, the deductibility of interest expenses has been limited.

The general rules of deductibility described above have not changed following the BEPS Action 4
report.

Part Two: Limitations on interest deductibility before the BEPS Action 4 report

2.1. General overview

In order to determine whether any applicable limitations on interest deductibility may apply under
Norwegian tax law, it is necessary to determine whether the capital shall be classified as debt or
equity. This is a classification issue which depends on an examination of the legal basis for the capital
provided, e.g. an agreement between the parties, as well as an overall assessment of a number of
criteria which have been developed in judicial and administrative practice focusing on the actual
substance of the capital rather than its legal form. If this overall assessment leads to the conclusion

22
Supra n. 5, p. 34.
23
Tax Code art. 6-1 (1)
24
Tax Code art. 6-40 (1).
25
Tax Code art. 6-40 (5) b) and c).

5
Norway – 2019 S1

that the capital is considered as debt and associated payments as interest, it is necessary to consider
whether the deduction of otherwise deductible interest expenses is limited as a result of the
application of the Norwegian arm’s length rule,26 the application of the Norwegian interest cap rules
or the application of the Norwegian GAAR.

Save for the interest cap rules, Norway has to a limited extent introduced rules that address the tax
treatment of interest in cross-border financing arrangements. The main principle under Norwegian
law is that the classification in the other country is irrelevant for the tax treatment in Norway.27 It is
therefore possible that a payment may be treated as interest under Norwegian tax law and as a
dividend under the domestic tax law of the other country (or the other way around). This may result
in double taxation or double non-taxation for cross-border financing arrangements. With one
exception, Norway has not yet introduced anti-hybrid rules to mitigate tax optimisation exploiting
such cross-border differences.

Norway introduced an anti-hybrid rule with effect from 2016.28 According to this rule, dividends that
would otherwise be tax exempt for corporate shareholders are treated as taxable income if the
payment is deductible for the distributing company. The rule did not change the definition of interest
or dividends under Norwegian law. The payment is still classified as dividends and not interest, but
the dividend exemption rule for corporate shareholders will not apply, i.e. the dividends are treated
as taxable income.

According to the wording of the provision, the exemption does not apply if the distributing entity
receives a deduction upon the distribution. This may be the situation due to hybrid instruments
where the financial instrument is treated as debt according to the rules in the country of the
distributing company and as equity according to Norwegian rules. However, based on the wording of
the provision, it is not restricted to situations where the difference in treatment between Norway
and the foreign country is caused by a hybrid element.

The OECD Action 2 recommendation is that countries should implement domestic rules targeting
hybrid mismatches that rely on a hybrid element to produce the tax advantage (e.g. deduction and
no inclusion). This refers to mismatches that result from the terms of an instrument and not
mismatches that are solely attributable to the status of the taxpayer or the circumstances in which
the instrument is held.29 For example, the OECD has recommended not applying the anti-hybrid rules
to payments by certain investment vehicles that are subject to special regulations, considering that
the tax policy of the deduction under the laws of the payer jurisdiction is to preserve tax neutrality
for the payer and payee.30 As the wording of the Norwegian provision does not require a hybrid
element in order to deny the exemption for the Norwegian shareholder, it seems to have a broader
scope of application than what follows from the OECD recommendation.

2.2. Limitations that re-characterise interest as a non-deductible distribution

The Tax Code itself does not provide a definition of the terms debt and equity and the classification
criteria have been developed through judicial and administrative practice. While it is clear that the
name the parties have chosen for the arrangement is not decisive, the starting point is to examine

26
Tax Code art. 13-1.
27
H. Matre, IFA Cahiers 2008 – Volume 93b. New tendencies in tax treatment of cross-border interest of
corporations, Branch report for Norway (Amersfoort: Sdu Fiscale & Financiële Uitgevers, 2008), p. 530.
28
Tax Code art. 2-38 (3) h)
29
OECD, Neutralizing the Effects of Hybrid Mismatch Arrangements, Action 2 – Final report, Inclusive
Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project (Paris, OECD Publishing, 2015), p.
18.
30
Ibid, p. 46.

6
Norway – 2019 S1

the legal basis for the provision of capital e.g. agreement, shareholder resolution etc. and then
perform an overall assessment of the characteristics of the capital based on a number of indicia in
order to determine whether the capital should be defined as debt or equity for Norwegian tax
purposes.

The key criterion for debt is whether there is an unconditional obligation to repay the capital. Thus, if
the repayment obligation is unconditional, the capital is likely to be classified as debt. In addition to
the repayment obligation, relevant criteria are whether the capital has “loss absorbing capacity” i.e.
can be used to cover losses of the company, whether the capital has priority in the event of
liquidation/insolvency, whether the investor has any influence over the management
of the company, whether there is a fixed payment for the use of the capital regardless of the annual
profits or a yield which is conditional on the company’s performance, whether the legal relationship
is of permanent or limited duration, etc. The importance of the individual elements must be
considered based on their relevance to the matter in question.31

In many instances, the classification as debt or equity may be straightforward. However, cases of
doubt typically involve hybrid financial instruments which have characteristics of both debt and
equity. As the assessment is based on many different factors, the outcome may differ from case to
case which reduces predictability for taxpayers but preserves flexibility to handle the variety of
different financial instruments observed in practice.

If capital is (re)classified from loan to equity, the result is that any interest deductions are
permanently disallowed. In addition, there will be secondary effects such as potential withholding tax
on dividends and dividend taxation for the investor.

Norway has not introduced any anti-hybrid rule for interest paid by Norwegian borrowers to foreign
lenders, e.g. no entitlement to deduction if the interest is treated as tax exempt income for the
foreign lender. However, the introduction of anti-hybrid rules was proposed by the Scheel
committee32 and the introduction of additional anti-hybrid rules is currently being evaluated by the
Ministry of Finance.

2.3. Limitations that disallow interest deductions without any re-characterisation

2.3.1. Limitations by reference to the borrower

Norway introduced interest cap rules with effect from 2014 for interest on loans between related
parties. The rules were introduced with the main aim of protecting the Norwegian tax base against
base erosion and profit shifting by multinational enterprises where interest expenses typically are
allocated to high tax countries like Norway while the interest is paid to countries with lower or no tax
on the corresponding interest income. In the preparatory works, the Ministry of Finance made
reference to the fact that most OECD countries had already introduced interest cap rules and that
such rules were being considered as part of the OECD BEPS project. According to the Ministry of
Finance, the need for interest cap rules was so evident that there was an immediate need to
introduce these rules.33 Although, the main objective of the rules is to address cross-border financing
arrangements, the rules apply both to domestic and cross-border interest payments. Furthermore,
the rules have a broad scope and will limit interest deductions in many situations where there is no
tax planning or risk of erosion of the Norwegian tax base.

31
K. A. Frønsdal, IFA Cahiers 2012 – Volume 97b. The debt-equity conundrum, Branch report for Norway
(Amersfoort: Sdu Fiscale & Financiële Uitgevers, 2008), p. 540.
32
Supra n. 7, p. 196.
33
Supra n. 18, p. 102.

7
Norway – 2019 S1

When the rules were enacted in 2014, the EBITDA ratio was 30%. With effect from 1 January 2016,
the EBITDA ratio was reduced from 30% to 25%. In the preparatory works, the Ministry of Finance
made reference to the fact that there was a need to implement more strict interest cap rules than
the rules currently in force to further mitigate tax planning using interest expenses. The Ministry of
Finance also stated that there was a need to introduce rules that also limit interest deductions on
external debt, but that such rules had to be further evaluated also taking into account that such rules
should not, to a large extent, limit interest deductions where there is no risk of profit shifting, so-
called “ordinary loan arrangements”. A further extension of the rules to apply to interest on external
loans should also be considered in light of the final recommendations from the OECD BEPS project in
relation to Action 4.34

The interest cap rules apply irrespective of whether the lender is an individual or a company or
whether the lender is resident in Norway or not. With respect to the borrower, the rules apply to
Norwegian entities that are considered as separate taxpayers for Norwegian tax purposes, to
Norwegian partnerships and to foreign companies, subject to the Norwegian CFC rules. The rules also
apply to non-resident companies with a permanent establishment in Norway. Companies within the
petroleum sector and financial institutions are outside the scope of the rules.

In principle, the rules apply only to loans between related parties. Parties are related if the lender
directly or indirectly owns or controls at least 50% of the borrowing company or if the borrower
directly or indirectly owns or controls at least 50% of the lender. The lender and borrower are also
considered as related parties if they are directly or indirectly owned or controlled by the same
company, typically a parent company meaning that two sister companies are considered as related
parties. Also. relatives to the lender, i.e. parents, siblings, children, grandchildren, spouse,
cohabitant, spouse parents, cohabitant parents and companies directly or indirectly owned or
controlled by such relatives with at least 50%, are considered as related parties to the borrower.

It is sufficient for the rules to apply that the parties have been related at any point in time during the
fiscal year. Thus, it is not possible to avoid the application of the rules by transferring shareholdings
during the fiscal year. However, if the parties have been related for only a part of the year, only
interest expenses corresponding to that part of the year are covered by the rules.35

As a main rule, only interest on loans between related parties are covered by the rules. However, in
order to prevent circumvention of the rules by using external loans, also interest on external loans
are included if a related party (other than a subsidiary) has provided security for the external loan or
in case a related party has a claim against the external party providing the loan, and this claim has a
connection with the loan granted from the external party to the borrowing entity (back-to-back
arrangements).36

In order to remove entities that pose the lowest risk there is a minimum threshold of NOK five
million (equivalent to approximately EUR 0.5 million37). The interest expense limitation is only
triggered if the taxpayer has total net interest expenses (i.e. net interest costs with respect to
borrowings from both related and unrelated parties) of more than NOK five million. However, if the
amount of net interest expenses exceeds this threshold, the limitation would apply to all related-
party interest costs, including interest within the first NOK five million.

34
Governmental proposal to parliament from the Ministry of Finance, Ot.prp. No 1 LS (2015-2016), p. 102.
35
Supra n. 15, https://www.skatteetaten.no/en/rettskilder/type/handboker/skatte-abc/2018/rentekostnader--
fradragsbegrensning-i-interessefellesskap/R-11.020/R-11.021/, s. 7.1.
36
Tax Code art. 6-41 (6).
37
Exchange rate: 1 EUR = NOK 9.46.

8
Norway – 2019 S1

If net interest expenses exceed NOK 5 million, net interest expenses to related parties can be
deducted only to the extent both internal and external net interest expenses do not exceed 25 % of
the taxable business profit of the borrowing company after adding back net interest expenses
(internal and external) and tax depreciations (“taxable EBITDA”). Only the part of the related party
net interest expenses that exceeds the threshold of 25% of the taxable EBITDA is treated as non-
deductible. The inclusion of interest on external debt in the calculation of the interest capacity of
25% of the taxable EBITDA implies that interest on external debt may affect (wholly or partly) the
deductibility of interest on related party debt.

Tax exempt income is not included in the taxable EBITDA. This limitation implies, e.g, that a
Norwegian holding company with only tax exempt shareholder income from underlying investments
will not be able to deduct any interest expenses even though such companies may have significant
positive EBITDA for accounting purposes and debt servicing capacity. In the preparatory works, the
Ministry of Finance evaluated whether tax exempt shareholder income should be included when
calculating the interest capacity, but this was rejected due the risk of tax planning whereby tax
exempt shareholder income could be shifted between related parties to increase the interest
capacity.38

The fact that tax exempt income is excluded from the definition of interest capacity is in line with the
recommendations in the BEPS Action 4 report. However, the BEPS Action 4 report goes even further
and recommends appropriate adjustments to be made for foreign source taxable income such as
dividends and branch profits to the extent that they are shielded from domestic tax by foreign tax
credits.39 The Norwegian rules do not contain any adjustments to the extent that the foreign source
income has been shielded from tax due to application of tax credits.

In case the application of the rules results in disallowance of deductibility of interest expenses, the
disallowed interest expenses may be carried forward for a period of ten years. However, the right to
utilise carried forward interest expenses requires that the taxpayer in the current fiscal year has a
total net interest expense (including carried forward interest expenses) above NOK five million. There
is no carry back of disallowed interest expense into earlier periods. Also, if the net interest expenses
are lower than 25% of the taxable EBITDA there is no carry forward of unused interest capacity for
use in future periods.

In case interest expenses are disallowed, the corresponding interest income is still taxable for the
creditor.

2.3.2. Limitations by reference to the lender

In principle, Norway does not limit otherwise deductible interest expenses by reference to
characteristics or actions of the lender. The deductibility of interest does not depend on whether the
lender is Norwegian or foreign or whether the lender is located in a tax haven or not. However, the
interest cap rules only apply if the lender and the borrower are related parties and the arm’s length
rule only applies if there is a community of interest between the parties to the transaction.

Norway has adopted special rules for loans granted between individuals and companies. Interest on
loans from an individual shareholder to a company is subject to additional taxation at the level of the
shareholder to avoid that an individual shareholder receives income in the form of interest, which is
more favourably taxed than dividends.40 However, the rules do not affect the deductibility of the

38
Supra n. 18, p. 112.
39
Supra n. 5, p. 48.
40
Tax Code art. 5-22.

9
Norway – 2019 S1

interest expenses for the company that has provided the loan. Furthermore, as from 7 October 2015
a loan granted from a company to an individual shareholder is for tax purposes classified as a
dividend distribution.41 The ordinary rules for dividend taxation apply to this deemed dividend. A
repayment of the loan is treated as an equity contribution and is added to the input value of the
shares.42 According to the preparatory works, there is no requirement that such loans are interest-
bearing, but if interest is imposed on the loan it follows the ordinary rules i.e. taxable for the
company and deductible for the borrower.43

2.3.3. Limitations based on other considerations

In addition to the interest cap rules, Norway has adopted an arm’s length rule in the Tax Code article
13-1 and also has a non-statutory GAAR. Both the arm’s length rule and the GAAR establish separate
and different criteria for their scope of application than the interest cap rules and the legal effects of
applying the rules are also different under each set of rules. The interplay between the different set
of rules is not entirely clear, but some observations can be made.

The arm’s length rule provides a legal basis for the adjustment of the price in transactions between
related parties if the income has been reduced due to a community of interest between the taxpayer
and another individual, company or entity. This provision may be applied to adjust the agreed
interest rate to the rate which would have been agreed upon between unrelated parties. It is also
clear that the application of the arm’s length rule may warrant structural adjustments e.g.
restructuring of loan capital into equity (but not the other way around) based on an assessment of
the borrowing capacity of the taxpayer (thin capitalisation). The legal effect of applying the arm’s
length rule is that the conditions of the loan (e.g. the size of the loan) and/or interest rate will be
adjusted to the terms that would have been agreed upon between unrelated parties.

There is no general anti-avoidance rule codified in the Tax Code. In 2016, the Ministry of Finance
submitted a proposal44 for such a statutory rule for public comments and the introduction of such a
rule is currently being evaluated by the Ministry of Finance. However, Norway has a case law based
GAAR where a transaction (or series of transactions) can be disregarded for tax purposes if two
conditions are fulfilled: (i) the main purpose of the transaction is to reduce tax (the basic
requirement) and, (ii) based on an overall evaluation of the effects of the transaction (including
commercial value), its purpose and other circumstances, it would be contrary to the basic purpose of
the tax provision concerned to recognise the transaction for tax purposes.45 The legal effect of
applying the GAAR is that the transactions wholly or partly are disregarded or reclassified for tax
purposes. The GAAR itself is not the legal basis for determining the tax effects of the disregarded or
reclassified transactions, instead these effects are determined based on the ordinary provisions in
the tax law.46

A landmark decision in relation to the interplay between the arm’s length rule and the GAAR is the
Supreme court judgment in the so-called Ikea-case.47 The question was whether the deductibility of
interest on inter-company debt established as part of an intra-group reorganisation, could be denied
for tax purposes based on the arm’s length rule or the GAAR. In short, the taxpayer performed a
demerger whereby real estate was transferred to separate companies and thereafter these real

41
Tax Code art. 10-11 (4).
42
Tax Code art. 10-11 (6).
43
Supra n. 34, p. 77.
44
F. Zimmer, NOU 2016:5, Omgåelsesregel i skatteretten, Lovfesting av en generell omgåelsesregel i
skatteretten, 15 March 2016.
45
See Supreme court judgment, Rt. 2012 p.1888 (Dyvi).
46
Supra n. 44, p. 36.
47
Supreme court judgment, HR-2016-02165A.

10
Norway – 2019 S1

estate companies were purchased by the taxpayer and the purchase price was financed with an
intra-group loan from a foreign group company. After the reorganisation, the taxpayer became
indirect owner of the real estate that previously had been owned directly. The taxpayer and the tax
authorities agreed upon the fact that the taxpayer was not thinly capitalised and that the interest
payments were arm’s length. However, the tax authorities still argued that the deductibility of the
interest expenses could be denied based on the arm’s length rule i.e. using the arm’s length rule as a
general anti-avoidance rule.
The Supreme court established that the arm’s length rule was not applicable in all cases where there
is a reduction of income due to a community of interest between taxpayers. Specifically, the court
established the principle that equity transactions fall outside the scope of the application of the
arm’s length rule.48

Another important area is the interplay between the arm’s length rule and the interest cap rules. In
the preparatory works to the interest cap rules, the Ministry of Finance emphasised that the
application of the arm’s length rule may lead to restructuring of debt into equity and/or adjustments
of the interest rate to conform to the arm’s length principle. After such adjustments have been
made, the interest cap rule may be applied to limit the allowable deductions of (arm’s length)
interest expenses.49 In the BEPS Action 4 report it is recognised that a country may apply an arm’s
length test in addition to a best practice interest cap rule as long as this does not reduce the
effectiveness of the best practice rule in tackling base erosion and profit shifting.50 Thus, the OECD
Action 4 report focuses on the effectiveness of the best practice interest cap rule as a limitation for
the application of the arm’s length principle under domestic law which does not seem to prevent the
view taken by the Norwegian Ministry of Finance.

The relationship between the GAAR and the interest cap rules is also an area with uncertainty. In
practice, it may be observed that companies mitigate the impact of the interest cap rules by using a
number of different strategies, e.g. replace related party debt with equity in order to prevent that
interest expenses are disallowed while the interest income is still taxable, shift taxable income
between group companies through group contributions to increase the interest capacity under the
EBITDA ratio51, replace internal loans with external debt etc. Some of these strategies (e.g. use of
group contributions) are discussed in the preparatory works, but based on policy considerations it
was decided not to address them in the legislation.52 It may be argued that since the interest cap
rules have been enacted with the objective of regulating this particular area with detailed and
specific rules, the threshold for any application of the GAAR is high i.e. adjustments performed by
taxpayers to mitigate the impact of the rules should not be viewed as contrary to the objective of the
rules.

Part Three: Implementation of the proposals in the BEPS Action 4 report

3.1. General overview

The interest cap rules currently in force are to some extent in line with the proposals in the BEPS
Action 4 report, but some of them have not (yet) been adopted. The rules currently in force apply to
loans between related parties and not to interest on external debt (with two exceptions as discussed

48
F. Zimmer, Høyesterettsdommer i skattesaker 2016, in Skatterett 36 (Oslo: Universitetsforlaget, 2017), pp.
231-232.
49
Supra n. 18, p. 110.
50
Supra n. 5, p. 25.
51
Norway has adopted a tax consolidation system whereby taxable profits can be shifted between companies
belonging to the same tax group (requirement of more than 90% ownership and voting rights at year-end), Tax
Code art. 10-2 to 10-4.
52
Supra n. 18, p. 111.

11
Norway – 2019 S1

in section 2.3.1 above), there is no group ratio rule, there are no targeted rules to support general
interest limitation rules and address specific risks, and there is no exemption for public-benefit
projects.

On 4 May 2017, the Ministry of Finance submitted a consultation paper for new interest cap rules for
public comments.53 On 8 October 2018, the consultation paper was followed up with a proposal from
the government to the parliament for new rules.54 According to this proposal, for companies that are
(or can be) part of a consolidated group for financial accounting purposes, the interest cap rules will
apply to loans from both related and unrelated parties, with the possibility to apply alternative
equity escape rules and a higher minimum threshold of NOK 25 million (equivalent to approximately
EUR 2.6 million55) at group level. For companies that are not part of a group as defined in the
proposal, the existing interest cap rules will not be changed. This will imply that there will be a dual
set of interest cap rules. The new rules are intended to come into force with effect from 2019.

In the government proposal, the Ministry of Finance makes an assessment in relation to a possible
exemption for public-benefit projects. However, this is rejected mainly due to the risk of profit
shifting also for companies engaged in such projects as well as to avoid that the rules become more
complex and more difficult to control by the tax authorities.56

3.2. Implementation of the BEPS Action 4 report

The main objective of the proposals that were issued on 8 October 2018, is to mitigate erosion of the
Norwegian tax base resulting from interest payments also to unrelated lenders and to harmonise the
Norwegian rules with the recommendations from the OECD BEPS project and the EU anti avoidance
directive.57

The proposal for new interest cap rules will, if enacted, affect companies that are part of a group for
accounting purposes.58 The rationale for only including group companies in the proposal is that the
risk of profit shifting is considered higher for companies that are part of a (multinational) group than
for companies that are not part of a group. Even though the objective of the rules is to target profit
shifting in multinational groups, they apply in principle also to pure domestic groups. A Norwegian
branch of a foreign company is not considered as a group company according to the group definition.
This may imply that it is more favourable to invest in Norway through a branch than through a
subsidiary. The Ministry of Finance has been aware of this issue but has decided not to propose any
special rules for branches in order not to increase the complexity of the rules.59

The proposal does not alter the definition of interest or the current EBITDA ratio, which is proposed
to be maintained at 25%. However, the minimum threshold is proposed to be increased to NOK 25
million, but this threshold will apply to all Norwegian companies that are part of the same group, not
on an entity level.

53
Consultation paper from the Ministry of Finance, Høringsnotat-Forslag til endringer i
rentebegrensningsreglene, 4 May 2017.
54
Supra n. 9.
55
Supra n. 37.
56
Supra n. 9, pp. 182-183.
57
Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that
directly affect the functioning of the internal market.
58
A company is considered part of a group if it is included on a line-by-line basis in a consolidated financial
statement prepared according to NGAAP, IFRS, IFRS for small and medium sized enterprises, GAAP in another
EEA country, US GAAP or Japanese GAAP or could have been included on a line-by-line basis in such
consolidated financial statements if IFRS had been applied. This assessment shall be based on the closing
balance sheets for the accounting year preceding the fiscal year.
59
Supra n. 9., pp. 157-158.

12
Norway – 2019 S1

Two alternative equity escape rules are proposed. The purpose of these escape rules is to exclude
interest on loans that are not related to profit shifting (so-called “ordinary loans”), from the scope of
the rules. These entail that a company may claim full deductions for all net interest cost if (i) the
company’s equity to total assets ratio is equal to or higher than that of the group`s consolidated
balance sheet, or (ii) if the Norwegian group companies’ equity to total assets ratio is equal to or
higher than that of the group`s consolidated balance sheet.

If the (adjusted) equity ratio for the Norwegian entities/Norwegian group does not vary by more
than two percentage points compared to the consolidated group financial statement’s equity ratio, it
is proposed that the ratio would be deemed equal to the group ratio.

Under the existing rules, the taxpayer may increase the taxable EBITDA by receiving a group
contribution from another company in the same tax group. A new limitation has been proposed to
avoid abusive strategies to mitigate the impact of the rules. The limitation applies where a
Norwegian company within a group applies the first equity escape rule above and grants group
contributions to other Norwegian group companies. In such a case, the group contributions shall be
disregarded when calculating the taxable EBITDA for the receiving companies. The objective of this
exception is to target situations where the requirements for the second equity escape rule are not
fulfilled i.e. at Norwegian group level, but where one company is using the first equity escape rule
and transfers all its taxable income to other Norwegian group companies thereby increasing the
taxable EBITDA for these companies.60

The assessment under the two equity escape rules shall in principle be based on the actual
consolidated group financial statements. Also, the assessment shall be based on the accounting
principles that are used in the group’s consolidated financial statements. Therefore, adjustments
have to be made when a Norwegian company’s (or subgroup’s) balance sheet items are based on
accounting principles other than those used in the group’s consolidated financial statements.

Additionally, all assets and liabilities need to be valued using the same method in the company’s or
Norwegian subgroup`s financial statements and in the consolidated financial statements. This
requires adjustments in the company’s or Norwegian subgroup`s financial statements for applying
the rules. The proposal contains detailed rules on the allocation of balance sheet items from the
consolidated group’s financial statements to the Norwegian companies within the group or to a
Norwegian subgroup. This applies to goodwill, badwill, additional values and impairment, debt,
shares in subsidiaries and loans to group companies.

As under the existing rules, disallowed interest expenses may be carried forward for a period of ten
years. However, a change has also been made to the existing interest cap rules in this respect. The
right to utilise carried forward interest expenses is currently not available if the taxpayer in the
current year has a total (including carried forward interest expenses) interest expenses below the
minimum threshold. This limitation is removed, which implies that carried forward interest expenses
can be deductible in a subsequent year within the interest frame even if they are below the
minimum threshold for that year. There is no carry back of disallowed interest expense into earlier
periods and there is no carry forward of unused interest capacity for use in future periods.

The equity escape rules are optional, and the taxpayer may also choose the one which is more
beneficial. However, if the taxpayer chooses to invoke the application of the escape rules, specific
documentation requirements apply including a requirement that the adjusted financial statements

60
Supra n. 9, p. 160.

13
Norway – 2019 S1

used for the application of these rules as well as a special reporting form to the tax authorities must
be approved by the auditor.

The new rules imply that there will be a difference in treatment between groups consisting of
Norwegian companies only and international groups. For groups with only Norwegian companies the
debt to equity ratio will always be equal to the ratio in the group`s consolidated balance sheet. Thus,
for such domestic groups the equity escape rule will apply without any further requirements. It will
be sufficient to document that there are no foreign companies or branches in the group for the
escape rule to apply.

The proposed rules contain an exception from the equity escape rules, which applies only if the
company has debt to a related party outside the group, e.g to a foreign lender who is a physical
person. Interest expenses paid to such a related party will be subject to the limitations under the
existing interest cap rules.

An interesting aspect of the new rules is the rationale for proposing equity escape rules rather than a
group ratio rule based on the group`s EBITDA ratio. In the proposal, the Ministry of Finance makes a
comparison of these two alternatives.61 In principle, the Ministry of Finance considers that both
alternative models are of the same quality and in line with the BEPS Action 4 recommendations. It is
also recognised that both models require detailed and complex rules. However, a group ratio rule is
rejected mainly because it is considered administratively more burdensome and more exposed to
changes in profitability than the equity escape rule.

Both a group ratio rule based on EBITDA and a group escape rule based on equity to total assets ratio
are in accordance with the recommendations in the BEPS Action 4 report. However, it is expected
that the application of the rules will impose a significant administrative burden on both the taxpayers
and the tax administration. The complexity of the rules in combination with burdensome
administrative and documentation requirements implies a risk that multinational groups will deter
from invoking the equity escape rules based on a cost/benefit assessment.

3.3. No Implementation of the BEPS Action 4 report

Please see the comments under sections 3.1 and 3.2 above.

3.4. European Union implementation

Norway is as a member of EFTA and is bound by the EEA Agreement, which extends the principle of
the internal market to three out of the four EFTA countries: Iceland, Liechtenstein and Norway.

The implementation of the interest cap rules in Norway has been influenced by the freedoms under
the EEA Agreement. Since the rules were submitted for public comments in 2013, there has been a
debate in Norway on whether they are compatible with the EEA Agreement. The position of the
Ministry of Finance has not changed during the debate, maintaining the view that the interest cap
rules are compatible with the EEA Agreement.

In September 2014, a complaint was filed against Norway with the ESA for imposing unjustified
restrictions on the deductibility of interest paid on debt to related parties.62 After several discussions
with the Ministry of Finance, ESA decided to investigate the case, issued a letter of formal notice to

61
Supra n. 9, pp. 162-164.
62
Complaint submitted by EY Norway to ESA on 29 September 2014.

14
Norway – 2019 S1

Norway on 4 May 2016 and, finally, a reasoned opinion against Norway on 25 October 201663,
concluding that the Norwegian interest cap rules are contrary to the freedom of establishment under
the EEA Agreement.

The position of ESA is that the interest cap rules constitute a restriction upon the freedom of
establishment. According to ESA,

“Although the rules should formally apply in the same manner to all taxpayers, in practice
Norwegian groups that are entitled to benefit from the group contribution rules will be able
to exempt themselves from the limit set by the interest cap rules. And it is to this extent that
the operation of the rules is discriminatory.

Specifically, the discriminatory effect arises where both a cross border group and a
Norwegian-only group rely on intra group loans and merely the Norwegian-only group can
benefit from the group contribution rules and be exempted from the interest cap limit.”64

In its assessment of whether the restriction may be justified, ESA emphasises that national legislation
as the interest cap rules which has the purpose of preventing tax-avoidance must be construed to
prevent only wholly artificial arrangements created with a tax avoidance purpose. ESA then mentions
that, under the Norwegian rules, interests will not be deductible if they exceed the limit set in the
rules for any reason. Considering that the current rules do not include any form of escape clause, ESA
concludes that arrangements do not have to be artificial to be caught by the Norwegian rules.

ESA requested the Ministry of Finance to make the necessary amendments to the rules in order for
the rules not to be considered as indirectly discriminatory. The proposal for new rules was issued on
8 October 2018 and the issue of the compatibility with the EEA rules is still debated.

As reviewed in section 3.2 above, the proposal has introduced two sets of interest cap rules, one for
related parties and one for group companies.

For the rules applicable to related parties, the group contribution rules will no longer have a decisive
role on whether the rules are contrary to the EEA Agreement. Group contributions can be granted
only between companies that are part of a group and, thus, they will not have an impact on the
calculation of the taxable EBITDA for non-group companies. However, there is still a question of
whether these rules may be considered as imposing an obstacle to the exercise of the fundamental
freedoms and, thus, still be contrary to the EEA Agreement.65

For the rules applicable to group companies, the arguments submitted by ESA are –in principle- still
relevant as Norwegian-only groups can still benefit from the group contribution rules and be
exempted from the interest cap rules. It is only in case a group contribution is received from a group
company that has applied the equity escape rule –at entity level- that the group contribution will be
disregarded for calculating the taxable EBIDTA.

However, in practice, the optimisation of the taxable EBITDA position by using group contributions
will no longer be required for Norwegian-only groups, as they automatically will qualify under the

63
EFTA Surveillance Authority, Reasoned opinion on infringement procedure against Norway dated 25 October
2016, Case No. 76153, Document No. 818742.
64
Ibid, p. 12.
65
There is a debate in international tax literature on whether interest cap rules that apply similarly to domestic
and cross border situations, are compatible with the fundamental freedoms. See A. P. Dourado, The Interest
Limitation Rule in the Anti-Tax Avoidance Directive (ATAD) and the Net Taxation Principle, 26 EC Tax
Review, Issue 3 (2017), pp. 118-119.

15
Norway – 2019 S1

equity escape rule. As previously mentioned in section 3.2 above, groups with only Norwegian
companies can always rely on the equity escape rules with minimum documentation requirements
i.e. de facto exempted. It is sufficient to document that there are no foreign companies or branches
in the group for the escape rule to apply. By contrast, EEA groups will have to make detailed
assessments with burdensome documentation requirements in order to rely on the equity escape
rules. This advantage maintains the difference in treatment between Norwegian-only groups and
cross border groups and, thus, the debate of whether the rules are still contrary to the freedom of
establishment.

Part Four: Cross-border consequences

4.1. Domestic rules addressing foreign interest-limitation rules

In domestic situations where the deductibility of interest is limited as a result of the application of
the Norwegian interest cap rules, the interest is still fully taxable for the Norwegian lender. However,
in a domestic situation where the deductibility of interest is limited as a result of the application of
the Norwegian arm’s length rule, e.g. reduction of the interest rate, the situation is different. In this
case it is assumed that the Norwegian tax authorities are obliged to perform a corresponding
reduction of the interest income for the Norwegian lender.66

Norway has not implemented any specific domestic rules addressing any corresponding reduction in
case a foreign jurisdiction limits deductions with respect to interest that the foreign borrower pays to
a Norwegian lender. Thus, the interest income is still fully taxable under domestic law. However,
there is a question whether Norway is obliged to perform a corresponding adjustment based on the
application of a relevant tax treaty. This is analysed in the section below.

4.2. Mutual agreement and other mechanisms for avoiding double taxation

4.2.1. Before the BEPS Action 4 report

Some tax treaties entered into by Norway establish the possibility to obtain relief of double taxation
through a corresponding adjustment. This is recommended in article 9 (2) of the 2017 OECD MTC,
which establishes that such obligation shall apply, to the extent that the state agrees that the
adjustment properly reflects what the profits would have been if the transactions had been at arm’s
length.67

Norway’s tax treaty policy has been to reserve the right not to insert paragraph 2 in its tax treaties.
The reason is that Norway would like to have the possibility of carrying out its own assessment of
whether the adjustment in the other country is in accordance with the arm’s length principle.68 This
reservation was included in the Commentaries to article 9 of the OECD MTC69, but it was removed in
2006.

In this context, a review of the tax treaties entered into by Norway indicates that they do not follow
the same approach. Three groups can be identified:

66
B. Folkvord et al., Norsk bedriftsskatterett, 18nd ed., (Oslo: Gyldendal, 2018), p. 1130; A.A. Skaar, Norsk
Skatteavtalerett (Oslo: Gyldendal, 2006), p. 434.
67
See 2017 Commentaries to art. 9 of the OECD MTC, s. 5.
68
Henning Naas et al., Norsk Internasjonal Skatterett, 2nd ed., (Oslo: Universitetsforlaget, 2017), p. 1059.
69
See 2003 Commentaries to art. 9 of the OECD MTC, s. 16.

16
Norway – 2019 S1

(1) A first group that establishes an obligation to carry out a corresponding adjustment in accordance
with the provisions of article 9 (2) of the OECD MTC. Our review shows that nine treaties (out of 89)
entered into by Norway are included in this group.70

(2) A second group that includes a provision on corresponding adjustments, but which differs from
the MTC. This group can be divided in two sub-groups. The first subgroup covers treaties that
establishes a possibility, but not an obligation, to make a corresponding adjustment. 71 A second sub-
group covers treaties that establishes such an obligation, but only if the adjustment is considered
justified.72 Our review indicates that 8 and 18 treaties (out of 89) are included in the first and second
sub-groups, respectively.

(3) A third group that does not include a provision regulating whether Norway has the obligation to
make a corresponding adjustment. Most of the tax treaties entered into by Norway (54 of 89 tax
treaties) are included in this third group. For cases involving countries in this group, the practice has
been to rely on the mutual agreement provision (MAP) included in these tax treaties.73

In general, a MAP covers cases in which a taxpayer considers that the acts of one or both of the
contracting states result or will result for the taxpayer in taxation not in accordance with the
provisions of the treaty, and cases in which there are difficulties or doubts as to the interpretation or
application of the treaty.

In Norway, a large number of MAP cases have involved transfer pricing issues and the economic
double taxation that may result when a contracting state makes adjustments to income from related
party non-arm’s length transactions among and between the members of a multinational group of
enterprises. The 2017 MAP Statistics reported by Norway to the OECD show that, from 76 cases, 34
concern transfer pricing issues.74

Whether Norway may be required to make a corresponding adjustment depends on whether it is a

result of the application of a transfer pricing rule, which falls within the scope of the application of
article 9 (1) of the relevant tax treaty. There is uncertainty regarding which rules fall within or outside
the scope of article 9.75 It may be proposed that the purpose of the rule should have a decisive role
on this issue. The scope of article 9 should be limited to rules that intend to ensure that the profits of
a taxpayer reflect an amount corresponding to the profits that would have accrued on an arm’s
length situation. As mentioned by Otto Marres,

“the material scope of article 9 is confined to cases where a profit adjustment is made for the
reason that conditions are made or imposed that differ from conditions agreed to between
independent enterprises. If so, the domestic measure is a profit allocation rule that must
meet the arm’s length standard and that in principle gives rise to a corresponding

70
See art. 9 (2) in tax treaties with Cyprus, Georgia, Macedonia, Malta, Romania, Serbia, Tunisia, United
Kingdom and Zambia.
71
See art. 9 (2) tax treaty with Argentina.
72
See art. 9 (3) tax treaty with Australia.
73
All tax treaties entered into by Norway provide for the possibility to initiate a MAP, except for one, where the
taxpayer is required to initiate domestic available remedies when submitting a MAP request. See OECD, Making
Dispute Resolution More Effective – MAP Peer Review Report, Norway (Stage 1): Inclusive Framework on
BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, p. 20.
74
OECD, Mutual Agreement Procedure Statistics for 2017, http://www.oecd.org/tax/dispute/2017-MAP-
Statistics-Norway.pdf (accessed 15 October 2018).
75
For further discussion see A. Bullen, Arm’s Length Transaction Structures. Recognizing and restructuring
controlled transactions in transfer pricing, IBFD Doctoral Series, Volume 20 (Amsterdam: IBFD, 2011), p. 72.

17
Norway – 2019 S1

adjustment. If not, the domestic measure is a tax base computation rule that in principle
must be applied without discrimination as to the state of residence of the payee.”76

It may be argued that interest cap rules fall outside the scope of article 9, as their purpose is not to
assimilate the profits to an amount corresponding to the profits on an arm’s length situation.
Instead, the rules are targeted at profit shifting between high tax and low tax jurisdictions. Thus, this
type of rules may be considered outside the scope of article 9 and, thus, the corresponding
adjustment obligation or MAP is not available for resolving cases of double taxation.

4.2.2. After the BEPS Action 4 report

On 7 June 2017 Norway signed the MLI, which is pending to be ratified.

In its provisional list of reservations and notification, Norway has made public its intention of
amending the provisions regulating MAP in some of its tax treaties to make the necessary
modifications to be compliant with the Action 14 minimum standard. 77

Where treaties will not be modified by the MLI, Norway reported to the OECD that “…it strives
updating all of them through bilateral negotiations, but has not yet a plan in place for that
purpose.”78

In addition, Norway has reported that it is in favour of including article 9 (2) of the OECD MTC in its
tax treaties where possible and that it will seek to include paragraph 2 in all its future tax treaties.79

Thus, Norway has chosen to implement article 9 (2) of the OECD MTC to its covered tax agreements
through article 17 (2) of the MLI. This would apply only if both contracting states decide to amend
the same treaty through the MLI and do not make a reservation to the application of article 17.

For the treaties that are not amended through the MLI, the OECD Peer Review has concluded that
Norway will not be required to amend this article of those treaties through bilateral negotiations,
provided that Norway continues granting access to MAP in eligible transfer pricing cases pursuant to
the MAP provision in its tax treaties.80

On 7 February 2018, the Ministry of Finance published a guide for MAP pursuant to tax treaties,81
which contains general information on the use of MAP in individual cases, as well as specific guidance
relevant for cases related to transfer pricing. The guide provides a list of issues that may be clarified
through a MAP, including allocation of profits to associated enterprises. The MAP guide has also
clarified that “Norway will not refuse a case for MAP on the grounds that the tax treaty does not

76
O. Marres, Interest deduction Limitation: When to Apply Articles 9 and 24(4) of the OECD Model, in G.
Maisto, P. Pistone & Dennis Weber (eds), Non-Discrimination in Tax Treaties: Selected Issues from a Global
Perspective, EC and International Tax Law Series, Volume 14 (Amsterdam: IBFD, 2016), p. 43.
77
OECD, Status of List of Reservations and Notifications at the Time of Signature,
http://www.oecd.org/tax/treaties/beps-mli-position-norway.pdf (accessed 15 October 2018).
78
OECD, Making Dispute Resolution More Effective – MAP Peer Review Report, Norway (Stage 1): Inclusive
Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project (Paris: OECD Publishing,
2018), p. 11.
79
Ibid, p. 26.
80
Supra n. 78, p. 27.
81
Government of Norway, Guide for mutual agreement procedure pursuant to tax treaties,
https://www.regjeringen.no/contentassets/a91a5dd41bde46c88ed4dfc2bf724252/map_guidance_norway.pdf
(accessed 13 October 2018).

18
Norway – 2019 S1

contain a provision regarding corresponding adjustment.”82 A MAP can be requested by the taxpayer
in accordance with article 25 of the applicable tax treaty.

Further, as the competent authorities are not obliged to agree on a solution in a MAP case, the tax
treaties entered into by Norway with the Netherlands, United Kingdom and Switzerland have been
amended to include, as from October 2017, regulations on arbitration in the MAP provision. In these
cases, the taxpayer can request for unresolved issues to be determined through arbitration.

82
Ibid, p. 3.

19