Due to Norwegian interest deduction limitation rules, a borrowing company does not necessarily have the right to deduct interest cost. If the borrowing company is part of a group there are even stricter rules introduced from 2019.
There are two parallel set of rules for limitation of interest deduction
Provisions to limit interest deductions on intra group loans were introduced from 2014. The purpose of the rules is to prevent multinational groups from deducting interest in Norway, whilst interest income is sourced to a jurisdiction that have no or low tax on interest.
The provisions apply firstly to intragroup loans. Note that an external loan may be regarded as an internal loan if a related party has provided security for the debt. The borrowing company’s external loan may then be reclassified and categorized as an internal loan. Secondly; from 2019 the interest limitation rule was extended for group companies. The rule applies for group companies also for external loans, even if it is not provided security for the debt from a related party.
For group companies the limitation of interest deduction applies both for internal and external interest costs according to both set of rules. See below about exceptions for group companies.
Limitation of interest deductions related to intragroup loans
The interest limitation rule applies to loan between related parties. Ownership or control of 50 per cent or more at some point during the year is required to be considered as a related party. The rules apply only if the net interest costs exceed NOK 5 million. If so, the interest deduction limitation is to apply in full, from NOK 1. Companies having lower net interest cost than NOK 5 million are entitled to deduct the interest costs in full.
If the borrowing company’s net interest costs exceed NOK 5 million, deduction of interest costs exceeding 25 per cent of a specifically defined result (a so-called tax EBITDA) is denied. The tax result before interest deduction limitation is used as a basis when calculating the interest deduction limit. Tax depreciations and net interest costs are to be re-allocated in the basis. The calculation of the deduction limit:
Ordinary income before interest limitation (included any group contributions)
+ tax depreciations
+ interest costs
- interest income
- group contributions received
= Basis for deduction limit
The borrowing company is entitled to deduct maximum 25 per cent of the basis for the deduction limit.
Denied interest deduction may be brought forward the next ten income years for deduction. Note that there is a condition that the carry forward amount is within the basis for the deduction limit the actual year.
The stricter rule for group companies has far-reaching exceptions
For group companies the stricter interest deduction limitation rule apply to external loans. The provision is motivated to counteract multinational groups to reduce tax in Norway by placing a disproportionate amount of debt in Norwegian group companies.
Only group companies with total net interest costs exceeding NOK 25 million, set total for the Norwegian part of the group, will be affected by the rule. When assessing whether the treshold amount of MNOK 25 has been reached, the Norwegian part of the group shall constitute Norwegian companies at the end of the income year.
The calculation of the deduction limit is based upon the same principle as for intragroup loans. However, in the calculation the deduction limit for group companies, group contributions shall not be included in the ordinary income. Hence, ordinary income shall be reduced for any received group contribution.
It has been a desire by the legislators that ordinary loans should not be affected by stricter interest limitation rule for group companies. A balance-based exception rule has therefore been introduced. Companies within a group will avoid interest deduction limitation if the equity ratio in the accounting balance either
(i) in the Norwegian company or
(ii) in the Norwegian part of the group
is equal or higher than the equity ratio in the group globally.
According to the exception rule, some adjustments must be made to the company’s account before the equity ratio is calculated. Clarifications related to the calculation of the equity ratio, both at the group level and at the company-level is proposed. Furthermore, it is proposed that if a company is merged into a company within a group during the income year, then the acquirer company cannot apply the balance-based exception rule at the company level.
The exception rule is voluntary and must be involved by the borrowing company in the tax return for the actual income year.
Norwegian (non- multinational) groups will not be affected by the stricter rule for group companies. However, Norwegian group companies may still be affected by the intragroup deduction rule, if the company has interest on loans to a related party outside the group (for example a physical person, or a company that is not part of the group).
The proposed adjustments to the rules are expected to have effect from 1. January 2019.