DNB won case regarding allocation of interest deductions between Norway and abroad in the calculation of taxable income

The bank DNB has a branch in New York. It receives deposits on which DNB pays interest. Most of the deposited funds are transferred to the head office in Norway for further lending.

In Norway, Norwegian companies generally also pay tax on their income abroad. When calculating the taxable income, deductions are made for interest expenses.

According to the tax treaty between Norway and the USA, the USA can tax the income from the branch as if it were an independent undertaking. Therefore, taxable interest income for the branch is calculated based on the transfers from the branch to the head office in Norway. The branch’s interest expenses are deductible in this calculation.

To avoid double taxation, the tax treaty allows DNB to deduct the taxed income in the USA from its taxable income in Norway, often referred to as the “exemption method.” The effect is that the interest expenses in the USA in principle are deductible twice: when calculating the taxable income in the USA, and when calculating DNB’s taxable income in Norway. Section 6-19 of the Tax Act contains a rule intended to reduce this double effect of the interest deduction.

For taxpayers required to file accounts, such as DNB, the rule is that no deduction is granted for debt interest corresponding to the balance between the value of the taxpayer’s assets in the undertaking abroad and the value of the taxpayer’s total assets, based on the book value in accounts prepared under the Accounting Act. This can also be expressed as a fraction, where the value of the assets in the undertaking abroad is the numerator and the value of the total assets is the denominator. The smaller the value of the numerator compared to the denominator, the smaller the reduction of the interest deduction.

The question in the case was whether the value of the internal receivable that the branch has on the head office as a result of the transfer of funds is included in "assets" within the meaning of the provision and thus included in the fraction. The internal receivable is entered in the branch accounts but not in DNB’s annual accounts.

The Supreme Court, like the Court of Appeal, concluded that the internal receivable should not be included, emphasising in particular the wording of the provision. This results in a total of NOK 1.7 billion in reduced tax for DNB for the relevant income years 2015 to 2019.

The ruling clarifies the calculation method when applying the interest deduction rule in section 6-19 of the Tax Act.

Section 6-91 only applies when the exemption method is used. Most tax treaties to which Norway currently is a party are based the so-called credit method. A treaty with the USA based on the credit method has been finalised but has not yet entered into force. 

Read the judgment from the Supreme Court (Norwegian only) (PDF)

Area of law: Tax law, section 6-91 of the Tax Act

Key paragraphs: 42, 43–45, 51, 64, 66

Justices: Indreberg, Bull, Bergh, Sæther, Sivertsen