On 7 October 2019, the Ministry of Finance presented its budget proposal for fiscal year 2020. The budget proposed to amends the interest expense deduction limitation rules and the Norwegian research and development (R&D) incentive scheme.

Interest deduction limitation rules:

Under existing legislation, interest would not be limited if the de minimis exemption of NOK 25 million applies to the Norwegian part of the group. According to the budget proposals, the “old rules” would apply even if the de minimis exemption applies. As a result, smaller groups may be subject to interest deduction limitations on certain loans to related parties. Smaller groups that have previously determined that they are not affected by the interest deduction limit rules may need reassess their position.

In order to counteract a reduction in the escape clause, the proposal of the Ministry of Finance would not allow merged companies to apply the escape clause at company level. The proposal seeks to prevent abusive tax regimes by merging a company with a high level of debt (compared to the group’s leverage) into a low leveraged group company that qualifies for the equity escape clause. The surviving company would have to prove that the equity ratio of the Norwegian part of the group is higher than the equity ratio of the whole group in order to qualify for the escape clause.

The definition of ‘group companies’ would be amended to include only group companies that would be consolidated under an applicable accounting standard as a group entity, unless there is a mandatory exemption from consolidation (as opposed to optional consolidation exemptions).

Research and Development (R&D) incentive scheme:

The current tax credit of 20% for SMEs and 18% for large companies would be replaced by a new unified tax credit of 19%. Purchases of third-party R & D services would be reduced from NOK 50 million to NOK 25 million. The hourly rate for employees would be raised from NOK 600 per hour to NOK 700 per hour. To prevent misuse of the SkatteFUNN regime, it is proposed to introduce a geographical restriction on the deductibility of R & D services.

The amendments are proposed to apply with retroactive effect from 1 January 2019.