Norwegian tonnage tax system may become more flexible from 2022 – Taxation

A proposal to modify the Norwegian tonnage tax system was submitted on Friday 24 September. In this article, our tax lawyers take a look at how these changes will affect shipping lines and the shipping industry if they take effect. Contact us if you have any questions.

Companies that meet certain conditions may elect to be taxed in accordance with the tonnage tax system under Articles 8-10 to 8-20 of the Norwegian Tax Law. The system provides tax exemption for income from maritime transport, while financial income is subject to ordinary tax with a tax rate of 22%. Companies that are part of the system must also pay a limited tonnage tax. There are currently strict limitations on the type of assets and activities allowed in the system.

The government has suggested changes to the tonnage tax system from 2022, which provide more flexibility. These also reduce the risk of disqualification from the system, causing unintentional exit. The government is proposing to allow certain types of activities that are currently not permitted; say “shared activities”. In addition, the government’s proposal includes minor adjustments related to guarantee provisions, deductions from deficits of limited partnerships and internal companies, as well as income regulations related to shares in partnerships. The government aims for the changes to take effect from the 2022 revenue year.

We include more details on the proposals below.

Introduction of access to shared activities

Currently, to be eligible for the Norwegian tonnage tax scheme, a company cannot engage in any business other than chartering and operating its own vessels or charter vessels or auxiliary vessels. Under the new proposal, companies in the system can also carry out other activities (shared activities). Activities that are not eligible for the maritime transport tax system will be taxed as ordinary income, with a tax rate of 22%.

First, it is proposed that qualified companies may from time to time use vessels for purposes other than transport and offshore service activities. For example, a vessel used for the bulk transport of petroleum products can also be used for the storage of these products.

Second, the system can include vessels that sometimes benefit from the tonnage tax regime during missions. An example is fish carriers which are sometimes used for transporting fish, and at other times, while under the same assignment, are used for stationary activities, such as delousing fish.

Third, it is proposed that activities which do not meet the conditions of the tonnage tax scheme can be carried out on board ships when the activities are closely related to the use of the ship. An example is the processing of fish on board a fish transporter during transport.

Fourth, it is proposed to allow activities with inland transport vessels in a limited area of ​​operation. Income is taxed if the distance traveled does not exceed 30 nautical miles for one third of the year or more.

Previously, the activities of companies within the tonnage tax system were limited. With the new proposal, the government seeks to encourage shipping companies to take on more profitable socio-economic missions. It is further expected that access to shared activities will reduce the risk of violation of the conditions of the tonnage tax regime, and therefore of unintentional exit from the system.

“The changes are not intended to expand the tax exemption system to include new segments in the shipment.”

To facilitate shared activities, it is also proposed to change the categorization of authorized assets in the system. According to the ministry, the deciding factor should be whether the assets can be used in whole or in part for tax-exempt boating activities.

The proposal for shared activities will have an impact on the rules on earnings from the construction of ships and the effects of group contributions.

According to the rules in force, the gains on the realization of the ships are exempt from tax. Opening up to pooled activities (activities outside the current regime) will also have an impact on tax liability when carrying out a vessel. The degree of tax liability for gains, or the right to deduct in the event of loss, will be calculated and determined according to the use of the vessel (taxable vs. tax-exempt navigation activities).

Group contributions from and to a company in the scheme are currently made without tax consequences. This also applies to taxable financial income. The proposed changes will allow group contributions to have a tax effect on income from taxable transportation activities. The group contribution must then always be set off against the taxable part of the transport income, both on the side of the service provider and the beneficiary of the group contribution.

The proposal will not provide access to group contributions with effect on taxable income / financial deficit.

Other proposed changes

Other adjustments are also proposed in the tonnage tax regime. These would have relatively modest consequences. The changes will clarify, adapt and correct the weaknesses of the current system.

The Government emphasizes that guarantee fees under the tonnage tax scheme should be taxed in the same way as interest income, as is otherwise the case under Norwegian tax law. Tax practice currently provides for full deductions for guarantee fees for entities [operating under] the tonnage tax system, when only part of the interest charges are deductible. According to the government, the limitation on deductions should therefore also apply to warranty costs.

Another proposition is that limited partnerships and silent participants in the tonnage tax system should not be able to offset losses with other financial income. The Government specifies that the limited possibilities for coordination, which apply in general, should also apply to limited partnerships and silent participants.

In addition, changes are proposed in the income regulations relating to investments in partnerships. Income settlements must be made if businesses that are not separate tax subjects enter the tonnage tax system. Income settlements are also made if a system company acquires a share of a participating company from a related company, which is normally taxed. The purpose of the regulation is to prevent the deferred gains tax accumulated before entry into the tonnage tax system from becoming tax exempt. The proposal would mean that the chosen price level has no impact on the calculation of taxable earnings.

In addition, it is proposed to extend the tax liability when acquiring shares. The acquisition of the share from a related company is no longer a tax condition.

The consultation deadline is January 7, 2022.

Originally posted September 28, 2021

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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