On 11 April 2013 the Norwegian Ministry of Finance published a legislative proposal and invited public submissions on the introduction of an interest deduction limitation for loans between related persons.
The proposed limitation applies where there is 50% direct or indirect ownership of share capital or voting power of one company by another. The paper proposes to limit the deductible amount of interest to 25% of an adjusted taxable income, when paid to a related person. The adjusted taxable income is taxable income increased by net interest costs and tax depreciation. The taxpayer will not be able to deduct interest payments to the extent such expenses exceed 25%.
Companies whose net interest costs are below NOK 1 million are expected to be exempt from the interest restriction. The interest deduction cap shall apply on domestic as well as cross border loans. Income accrued from interest payments will be taxable income for the lender regardless of the cap on deduction for the borrower. The cap will not apply to external bank financing, although a few exemptions are made to prevent “back-to-back” loans through external banks.
The debt/equity ratio is irrelevant under the proposal. The proposed legislation covers both limited and unlimited companies, controlled foreign corporations (CFC), and foreign entities with limited tax liability in Norway. Financial institutions are to be exempt.
The deadline for public submissions set by the Ministry is 24 June 2013. The proposed legislation, if enacted, is expected to take effect as from the tax year 2014.
