Discretionary tax assessment in cases of thin capitalisation

The Petroleum Tax Office issued a discretionary tax assessment under section 13‑1 of the Tax Act on associated enterprises in relation to a Norwegian subsidiary of a foreign parent company. The basis for the assessment was that the subsidiary had borrowed more from its Polish parent company than it would have been able to obtain from independent lenders, known as thin capitalisation. The excess portion of the loans was therefore reclassified as equity, and interest deductions were denied on that portion. The Norwegian company brought the discretionary assessment before the courts, seeking judicial review of the method applied in thin‑capitalisation cases.

In its judgment, the Court of Appeal laid down several instructions for how the Petroleum Tax Office was to carry out the discretionary assessment. These instructions resulted in a lower upward adjustment of income, and thus a lower tax increase for Norway, than under the Petroleum Tax Office’s original decision. The State, represented by the Petroleum Tax Office, appealed one of these directives. That directive required that, for the part of the loans that was not reclassified, a market interest rate for comparable loans be applied. Because the interest rate on the intra‑group loans was lower than the market rate for comparable loans, this would result in an adjustment in the taxpayer’s favour. The question before the Supreme Court was whether a discretionary assessment under section 13‑1 subsection 3 should take into account only income‑reducing effects of the association between the parties, or whether income‑increasing effects must also be included, in other words, whether a net assessment should be applied.

The Supreme Court held that a discretionary assessment under section 13‑1 subsection 3 must be based on a net assessment of the individual transaction. Both tax‑reducing and tax‑increasing effects of the association between the parties must be taken into account. Adjustments in the taxpayer’s favour may therefore be made, provided that the net effect is an increase in taxable wealth or income. This conclusion follows primarily from the wording of section 13‑1 subsection 3 and is also supported by other legal sources. The Supreme Court further held that adjusting the interest rate does not require the contractual term to fall outside an arm’s‑length range.

The judgment is significant for discretionary tax assessments under section 13‑1 of the Tax Act in cases involving thin capitalisation.

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

Area of law: Tax law, section 13‑1 of the Tax Act

Key paragraphs: 68–69

Justices: Bull, Thyness, Hellerslia, Stenvik, Steen