Factsheet: Limitation of deductions for interest expenses to related parties
The Government proposes new rules limiting tax deductions for interest expenses to related parties. The proposal aims to avoid multinational corporations shifting taxable profit from Norway to low tax countries. Interest deduction limitations will create a more level playing field for businesses competing with corporations engaged in extensive tax planning. International enterprises have incentives to allocate debt, and thereby interest expences, to companies domiciled in countries with a relatively high tax rate, including Norway. Correspondingly, interest income is allocated to low tax countries. As a result, the total tax burden of the enterprise is reduced. A similar problem to be addressed is loans from tax exempt municipalities to companies owned by the same municipalities.
According to the proposal, deductions for intra-group interest expenses will be disallowed if total net interest expenses exceed 30 pct. of adjusted taxable income.
Only net intra-group interest expenses will be disallowed. However, interest paid to unrelated lenders is included when calculating the interest deduction limit.
Parties are considered related when there is ownership or control of 50 percent or more. In order to limit possible tax avoidance schemes, certain interest payments to unrelated parties are included.
The calculation basis for the limitation is taxable income adjusted for the value of tax depreciation and net interest expenses.
Disallowed interest expenses could be carried forward ten years.
The Ministry proposes a threshold of NOK 3 million for the limitation to be applicable.
The proposal applies to limited companies and similar other companies and entities. Further, the proposal applies to partnerships, shareholders in CFC-companies and foreign companies with permanent establishment in Norway. Financial institutions are exempt from the limitation rule.
The increase in tax revenue is estimated to approximately NOK 2,55 billion.