Possible introduction of limited withholding tax on bareboat charter payments from Norwegian entities

The Norwegian Ministry of Finance has published a consultation paper regarding withholding tax on outbound interest, royalty and certain rental payments payable by a Norwegian entity to a related foreign entity. The proposed tax rate is 15 per cent and will if implemented be effective for relevant payments made as from 1 January 2021.

In the consultation paper, the Ministry of Finance debates whether a withholding tax on outbound payments for leasing of certain physical assets (including vessels, rigs, planes and helicopters) should be introduced, subject to the lessor being a related party to the Norwegian lessee. The discussion is limited to payments to related parties as the Ministry regards such transactions to be at most risk for profit shifting out of Norway through leasing payments.

A “related party” is a company or other legal entity which controls, is controlled by, or is under common control with, the Norwegian lessee. “Control” means the direct or indirect ownership of 50 per cent or more of the issued share capital or voting rights.

The consultation paper seemingly addresses only bareboat chartering of vessels, i.e. leaving time chartering out. In our view, the exclusion of time charter contracts would be sensible, and we assume that this will be a part of the discussion in the consultation period.

Norway’s double tax treaties will often restrict Norway from levying withholding tax on outbound bareboat charter payments for vessels, meaning that the withholding tax will have most effect in cases where the lessor is resident in a country which does not have a double tax treaty with Norway.

With regards to companies within the Norwegian tonnage tax regime, the Ministry suggest that such companies are exempt from the obligation to withhold tax on lease payments.

If withholding tax on bareboat charter payments will be limited to payments to related parties from Norwegian entities outside of the tonnage tax regime, it clarifies an uncertainty which have been discussed since the 2014 Tax Commission which suggested the implementation of withholding tax on all outbound leasing payments for such physical assets as detailed above. The position in the consultation paper is as such more positive than expected (if not adjusted based on feedback in the public hearing).

The Ministry will await feedback from the public hearing before deciding on whether they will move forward with such a withholding tax, but we would expect that the Ministry will move to implement this. The deadline for comments is set to 27 May 2020.

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