Wikborg Rein Newsletter: Revised National Budget - Adjustments to the tonnage tax regime

The revised national budget was published 15 May 2008, and the most significant tax proposal relates to the new tonnage tax regime. The Government proposes adjustments to the transitional rules and certain other adjustments.

Extended transitional period
Companies that choose to enter the tonnage tax regime must calculate a tax upon entry based on the untaxed reserves in the company. For companies entering the tonnage tax regime in 2007 and 2008, the transitional rules allow the tax upon entry to be based on book values. From 2009 the calculation must be based on the market value of the assets.

In order to qualify for the tonnage tax regime, many of the shipping companies must reorganise. This will often be done most tax efficiently by a demerger. However, a demerged company is not allowed to enter the tonnage tax regime before 1 January in the year after the completion of the demerger. A tax efficient reorganisation prior to an entry into the tonnage tax regime is therefore not achievable within the transitional period.

The revised national budget includes a proposal to extend the transitional period to include 1 January 2009. This entails that companies entering the tonnage tax regime on 1 January 2009 can calculate the tax upon entry based on book values. This extended period allows for necessary reorganisations to be finalised in 2008, whereby the shipping companies can enter the tonnage tax regime as of 1 January 2009.

Internal transactions before entry
Sale of shares in partnerships or limited partnerships from an ordinary taxed company to a related company subject to tonnage tax will trigger taxation even though such sale normally is covered by the exemption method in Norway. The taxation will be based on the market value of the shares. This taxation could be avoided by first transferring the shares to another related party which is subject to ordinary tax, which again sells the shares to a tonnage tax company. The first sale will be tax exempt according to the exemption method, while the second sale will not trigger any taxation as the market value is more or less the same as the tax basis.

The Government proposes to amend this rule so that internal transfer of shares in partnerships or limited partnerships prior to a sale to a tonnage tax company or to a company that later enters the tonnage tax regime are taxed, provided that the prior internal transfers increase the tax basis. Internal transfers within three years before the year of the transfer to the tonnage tax company shall be included. Thus, any increase in the tax basis the last three years due to internal transfers will be taxed. This could potentially trigger a significant taxation of previously exempted transactions between related parties. The proposal also applies to transfer of partnership shares to a tonnage taxed company already completed in 2008.

Sale of shares in partnerships
Companies that enter the tonnage tax regime under the transitional rules are subject to a three year lock-in period. Any sale of assets or exit from the tonnage tax regime within the first three years will trigger taxation of any gain. The purpose is to avoid that a company enters the tonnage tax regime with the aim to sell the assets without taxation. Since ordinary taxed companies could have sold shares in partnerships and limited partnership without taxation, the Government proposes that the three year lock-in period should not apply to ownership in such partnerships. Tonnage taxed companies would otherwise suffer a higher tax than ordinary taxed companies.

Distribution of untaxed reserves
The new tonnage tax regime triggered a taxation of untaxed reserves for companies within the previous tonnage tax regime. If these companies entered the new tonnage tax regime in 2007 they must tax two thirds of the untaxed reserves over a period of ten years. Any distribution of untaxed reserves would trigger an immediate taxation according to the rules regarding equalisation taxation (No: korreksjonsinntekt).

Some of the tonnage taxed companies have included the discounted value, and not the nominal value, of the tax liability in their accounts. This could to some extent allow the tonnage tax companies to distribute untaxed reserves as dividend without triggering any taxation. Therefore, the Government proposes that the nominal value of the tax liability shall be included in the calculation of the equalisation tax, regardless of the amount in the accounts.


For more information, please contact:
Anders Myklebust, partner
tel.: +47 22 82 75 54, e-mail: amy@wr.no

Marianne Iversen, partner
tel.: +47 22 82 76 33, e-mail: miv@wr.no

Last ned (newsletter_may_08)