The amendments of the Norwegian tonnage tax regime in 2007 proved to be controversial, followed by industry complaints and lawsuits subsequent the Government's decision to retrospectively tax income that was previously subject to a tax deferral. In 2010 the Supreme Court ruled that the amendments were unconstitutional and were therefore substantially reversed. Since, the Norwegian tonnage tax system is considered competitive and ship owners, both domestic and internationally based, are showing great interest in the Norwegian tonnage tax system due to beneficial features. In May 2017, the Ministry of Finance notified the EFTA Surveillance Authority1 of several additional amendments and limitations.
Norwegian shipping industry in short
Norway has been a major player in the global maritime industry for more than 150 years and the maritime industry is one of Norway's largest export industries. The Government of Norway continuously expresses that Norway shall be the world leader in maritime expertise and in maritime research and innovation. Thus, a broad specter of maritime activities has grown up around traditional shipping operations. The shipping industry and the maritime know-how are important for the economy and employment in Norway, in particular in many local communities along the Norwegian coast. Norway represents one of the world's largest shipping fleets and the world's second largest offshore service fleet. Hence, one of the objectives of the state aid, i.e Norwegian tonnage tax system, is to ensure the continued competitiveness of the Norwegian shipping industry.
There is a final tax exemption for shipping revenues for companies within the Norwegian tonnage taxation system. The tax exemption includes operating profits and gains on sales. However, net financial income is taxed at a rate of 24%. Net financial income constitute income from interest, foreign exchange gains and gains on shares.
Norwegian tonnage taxed companies are obliged to pay an annual, moderate tonnage tax, based on the net registered tonnage. The tonnage tax rate is directly fixed by the Norwegian authorities and is not linked to the corporate taxation system as such. The tonnage tax is payable irrespective of the company's results.
Generally and in broad terms, there are four key conditions that must be fulfilled in order for a company to qualify for the Norwegian tonnage taxation system. First, the company has to be a Norwegian registered and tax resident limited company or a comparable company resident in an EEA member state that only carry out qualifying shipping activities taxable in Norway. Secondly, the qualifying company must, as a minimum requirement, own a qualifying vessel, directly or through a chain of companies. Further, there is a requirement that the qualifying company does not own any disqualifying assets such as real estate. Finally, the company must engage in qualifying activities only, i.e. ownership, leasing and operation of vessels whether the vessels are directly owned or chartered. Furthermore ancillary activities must be closely related to the operations of the owned or leased qualifying vessels. The Ministry of Finance does not propose amendments to these key principles or the rates for tonnage tax.
Windmill farm vessels
The definition of allowable vessels in the Norwegian tonnage tax system is not an exhaustive list of allowable types of vessels. Rather, the terms "vessel in transport" ("skip i fart") and "support vessel in petroleum activities" ("hjelpefartøy i petroleumsvirksomhet") are used in legislation to define the scope of the scheme. Hence, most vessels types have been eligible if the vessels are not used in functions that are a part the core activities of oil and gas extraction.
According to the current administrative practice, vessels involved in activity in connection with construction, maintenance, repair and disassembly of windmills at sea, may be eligible for the special tax scheme only to the extent that the vessels are used in maritime transport. Now, the Ministry of Finance proposes that vessels involved in the mentioned activities–are made eligible for the tonnage tax system (even when the vessels are not used in transportation assignments). However, the tonnage tax system will not be available to windmill farm vessels operating in Norwegian internal waters, as foreign companies performing such activities would be liable to tax in Norway. This expansion clarifies that the treatment of windmill farm vessels under the tonnage tax system, and will therefore also include vessels that are not involved in marine transport per se.
Limitations on bareboat chartering
One of the more controversial proposals is the limitation on outbound bare-boat chartering to unrelated parties. For the purpose of the notified limitation, bare-boat chartering is defined as the chartering of vessels without crew. The notification includes a proposal whereas revenues from outbound bare-boat chartering may be qualified for the tonnage tax system provided that:
- "Strategic management" of all vessels chartered out on bare-boat terms must be carried out from the EEA area. In this context, "strategic management" is a higher management level of the company, such as the CEO and the Board of Directors.
- Outbound bare-boat chartering contracts must not exceed a contract period of 5 years plus an option to extend the contract for up to 3 years. The Ministry of Finance states that the 5+3 year duration is common in the offshore service sector. However, the current proposed change will affect all companies.
- The bare-boat activity does not exceed 50% of the qualifying company's total tonnage. If part of a group, it must be measured at group level. It is proposed to measure the ratio annually, however, with an option to measure over a period of 4 years.
Under the proposal, the limitations on outbound bare-boat chartering shall not apply to intra-group bare-boat contracts. An additional exception is proposed without clarifying the details, i.e. contractual arrangements where a shipowning company charters the vessel on bare-boat terms to an unrelated foreign party and provides the crew from another related entity.
Limitations on time chartering in non-EEA flagged vessels
The Ministry of Finance also notified a limitation of 90% on the chartering in of non-EEA flagged vessels on time-charter or voyage-charter terms. For the purpose of this context, time charters and voyage charters are defined as the chartering of vessels with crew.
The current tonnage tax system has been approved by ESA until 1 July 2017 and the re-notification is for an additional period of ten years ending on 31 December 2026. Based on the letter from the Ministry of Finance the proposed amendments may be effective already from 1 July 2017. However, the Ministry of Finance has not stated when a bill is expected to be submitted to the Parliament for approval. It is likely that the bill will be held back until ESAs response.
The expansion of the tonnage tax system to include windmill farm vessels is good news for those affected by this change, and reduced activity within the petroleum sector reinforces offshore wind power as an attractive business area for companies with vessels, crew, and know-how related to the offshore petroleum service sector.
On the contrary, the notified limitation on outbound bare-boat chartering to external parties may negatively affect many market players currently qualifying the Norwegian tonnage tax system. In particular, the transitional rule is more restrictive than necessary, as it will affect existing contracts entered into long before the publication of the notification. Existing bare-boat charter contracts with a duration longer than five years (plus the three-year option) will likely be considered an illegal asset under the amended rules, and may consequently imply an exit from the tonnage tax system.
There are several open questions related to the details and further content, in particular related to the proposed chartering restrictions. Furthermore, it is not virtually certain the amendments meet ESA's requirements to approve the tonnage tax system. This leaves shipping companies in an uncertain position related to what kind of measures that should or can be done. It could pose a risk for the transfer of vessels and/or companies to other tonnage tax systems within EEA and/or non-EU jurisdictions.
- * The EFTA Surveillance Authority (ESA) monitors compliance with the agreement on the European Economic Area (EEA agreement) in Iceland, Liechtenstein, and Norway, enabling those countries to participate in the internal market of the European Union