Norway: Proposed changes to tonnage tax regime
A proposal for changes in the tonnage tax regime for public consultation hearing
A proposal for changes in the tonnage tax regime for public consultation hearing
The Ministry of Finance submitted a proposal for changes in the tonnage tax regime for public consultation hearing. The proposal would allow certain types of shipping activities that are currently not permitted within the regime and would, among other things, have an impact on shipping related to aquaculture and the transport of petroleum.
The Norwegian tonnage tax regime is a voluntary system, whereby shipping companies are taxed on the basis of their tonnage instead of on profits. In order to qualify for the tonnage tax regime, certain conditions must be met (refer to sections 8-10 to 8-20 in the tax law). Under current law, companies within the system can, in principle, only conduct business in the form of hiring out and operating their own and leased specific ships and activities closely connected with this.
Overview of proposals
The Ministry of Finance proposes to allow for shipping companies under the tonnage tax regime to conduct certain kinds of shipping activities that currently are not permitted. Such a combination of tax-free and taxable shipping activities would be referred to as "shared activities.” Revenue from activities that does not qualify for tax exemption would be subject to standard tax at a rate of 22%.
The purpose of the proposed changes allowing shared activities would be to provide companies within the system greater flexibility, as well as to reduce the risk that breaches of the terms of the tonnage tax regime could result in involuntary exit from the regime. The Ministry emphasized that the changes are not intended to expand the system to include new segments within shipping, but rather to facilitate the ability of shipping companies to continue with tax-free activities that are covered by the current system. This would address those situations when it could be appropriate and commercially logical to engage in activities that are not permitted according to the current system.
Access to shared activities
According to the proposal, the use of a vessel in the future would be decisive for determining whether the business is tax-free or taxable.
A basic requirement for a vessel to be a qualifying and permitted asset is that the vessel is at least suitable for use partly within tax-free shipping activities. According to the proposal, a vessel would not be a qualifying or permitted asset until the first income year the vessel is used for activities that may, fully or partially, qualify for the tax exemption and thus the tonnage tax regime.
On the other hand, once the vessel is considered a qualifying and permitted asset, there would be no requirements for continued use for tax-free shipping activities. It is explicitly stated in the consultation note that a vessel could be a permitted and qualifying asset even if it is not used in tax-free activities during the income year.
The Ministry emphasized four types of situations when shared activities are relevant for shipping companies within the system, and when shared activities would be allowed:
- When a shipping company undertakes an assignment with a vessel, but the activity related to the assignment does not qualify for tax exemption according to the system. An example would be shuttle tankers that are designed for transporting oil. Such vessels and such activities would be permitted within the current tonnage tax regime, and the income would be exempt from tax. If, on the other hand, the vessel undertakes assignments in the form of storage of oil (bunker fuel tanks), the activity would not be legal according to the current rules, but would be a permitted taxable activity according to the proposed changes.
- When a shipping company undertakes an assignment with a vessel and the activity occasionally qualifies for tax exemption in accordance with the tonnage tax regime. An example would be fish carriers, which for periods of time during an assignment are used for transporting fish, and for other periods during the same assignment are used for stationary activities, for example delousing fish. What is allowed according to the current system is disputed. The proposal for a new system stipulates that an activity such as delousing will be a permitted taxable activity. In our view, this represents a change from current administrative practice, where the tax authorities historically have until recently not challenged that such activities are permissible as non-taxable under the current tonnage tax regime.
- When a shipping company undertakes an assignment with a vessel that transports goods, and there is activity on board that is closely related to the use of the vessel but that, by its nature, does not qualify for tax exemption according to the tonnage tax regime. An example would be an assignment with a fish carrier that transports fish when processing of the fish is performed while the vessel is in motion. The proposal for a new system stipulates that such processing would be a permitted taxable activity.
- When a shipping company uses a vessel for stationary activities, port traffic or other activities over a limited area of operation when the distance sailed does not exceed 30 nautical miles for parts of the year. According to practice with the current system, a vessel in domestic traffic with a distance sailed below 30 nautical miles for more than one third of the income year will entail that the vessel fails to comply with the system. With the proposed system, the activity of these vessels would also be permitted, but would be a taxable activity. If, on the other hand, the distance travelled exceeds 30 nautical miles for more than two-thirds of the income year, the activity would be fully tax-free under the current system.
Establishment of tax-free and taxable shipping revenue
The extension of the tonnage tax regime to include shared activities presupposes that income from business that does not qualify for tax exemption would be taxed ordinarily as general income (22%). This means that, for tax purposes, a distinction would need to be made, so that the tax-free and taxable income would be handled separately.
- It is proposed that income and expenses would be split in accordance with the arm's length principle (i.e., as if the activities had been carried out by independent companies).
- The allocation of income and expenses could result in a number of practical challenges. In comparison, allocation between taxation of onshore and upstream petroleum costs has been the subject of many disputes at the Petroleum Tax Office.
- Standard rules for deduction are proposed for costs concerning classification, insurance, maintenance and depreciation. A proportional deduction could be required based on the vessel's share of days of operation and rental in the income year, multiplied by the ratio between taxable and total operating income. Depreciation is proposed to be determined on a linear basis with a 7% rate for special vessels in the petroleum sector and 4% for the remaining vessels. The general rule is that the basis for depreciation is set at cost price. Because no changes are proposed to the rules on entry tax, the basis for depreciation for vessels owned upon entry would be set by the market price at the time of entry.
- For costs that cannot be directly linked to an assignment (such as administration, board management, and interest costs), no deduction would be allowed from taxable income.
- According to the proposal, taxable net profits from tax liable shipping activities could not offset against any deficits on taxable net financial income.
- For companies with vessels that will have a relatively high proportion of taxable shipping revenues, it is not a given that tonnage taxation would be an advantage compared to ordinary taxation.
Other elements with the shared business system
Other aspects of the shared activities system include:
- Profit from the realization of the vessels would be taxable to the same proportion as the distribution between tax-free and taxable income in the years within the tonnage tax regime.
- Upon exit from the tonnage tax regime, tax values would be established as under the current system, with the exception of vessels that have been used for taxable activities within the tonnage tax regime. The value would be set at a combination of market value on exit and tax value used within the system.
- Group contributions with tax effect to companies within the same tax group are permissible for income from the taxable shipping activities, but not for taxable financial income/loss. It is proposed that the rules limiting group contributions for companies that have left the system would continue.
- A number of rules are proposed to be continued without changes, including the rules on entry, flag requirements, and increase of income for “thick” capitalization, tonnage tax, group requirements, and deadline for rectification.
- The condition of distance sailed over 30 nautical miles is proposed to be specified in accordance with the Norwegian Directorate of Taxes' statement of principles of
10 April 2019.
According to current law, guarantee commissions have been regarded as "other financial costs" which are fully deductible according to the tonnage tax regime. However, according to administrative practice from the tax authorities under ordinary tax rules, guarantee commissions that replace higher interest costs and that are paid to others than the lender, are considered interest costs. The Ministry proposes to legislate that the same would apply within the tonnage tax regime.
The Ministry proposes to repeal the special arrangement in the section 8-15 TA sixth paragraph (that is, the limitation in deducting losses from limited partnerships and internal partnerships according to the section 10-43 TA, does not apply to tonnage taxed participants). The change would mean that tonnage taxed companies could only carry forward such a loss as a deduction in future income from the same limited partnership or internal partnership.
The Ministry also proposes changes to the rules for income settlement related to participations in companies with partnerships.
Deadline for the public hearing and effective date
The Ministry aims for the changes to begin as from the income year 2022. The proposals require EFTA approval, and the final bill will not be submitted to Stortinget until such an approval is available.
The consultation deadline is 7 January 2022.
For more information, contact a KPMG tax professional in Norway:
Ellen Kristiansen Wærnhus | +4747645737 | firstname.lastname@example.org
Anna Holen | +4798645728 | email@example.com
Per Daniel Nyberg | +4740639265 | firstname.lastname@example.org
Pål-Martin Schreiner | +4740634526 | email@example.com
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