Proposed Amendments to the Norwegian Special Tax Regime for Shipping Companies

The Government proposes amendments to the special tax regime for shipping companies in order to equalize the competitiveness of the regime compared to other European tax regimes for shipping. The aim is to ensure that Norway can maintain its position as one of the leading countries for international shipping.

The current Norwegian tax regime for shipping companies offers eligible companies a postponed taxation of profits derived from operation of ships, until untaxed dividends are distributed to shareholders, or the company exits the special tax system. Since the regime was introduced in 1996, a number of other European countries have introduced low-tax regimes for shipping. These regimes generally give a final exemption from taxation of shipping profits. Consequently, the Norwegian regime is no longer adequate in order to ensure new shipping investments in Norway. New investments are to a large extent placed in low-tax regimes for shipping in other countries.

In the light of this, the Government proposes that the current special tax regime for shipping is replaced by an exemption regime, corresponding to the special tax regimes for shipping in other European countries, i.e. shipping income will be tax exempt on a permanent basis. The amendments will take effect from the fiscal year 2007.

According to the prevailing regulation, only profits derived from the ownership, leasing and operation of ships fall under the Norwegian special tax regime for shipping. Since companies under the special tax regime are not entitled to have employees of their own, all services (e.g. the placement of seafarers and secondary businesses) must be performed by companies not taxed under the special tax regime. In order to improve the competitiveness of the Norwegian tax regime for shipping, the Government proposes amendments to allow strategic and commercial management and other secondary activities to fall under the special tax regime. However, the Government does not at present time propose a management requirement.

As a main rule, deferred taxes will be settled upon entry into the new shipping tax regime. Thus, on leaving the new tonnage tax regime, i.e. as from the fiscal year 2008, the company will not be subject to an income settlement. The Government does not propose a lock-in period.

Companies assessed under the current tonnage tax regime have accumulated a considerable deferred tax liability. An annulment of the deferred tax will not have any consequences for the profitability of future investments in Norwegian shipping industry, and will also have poor distributional effects. Therefore, the Government proposes that profits derived from shipping activities within the current regime shall be subject to taxation when entering into the new tax regime for shipping. The taxable profit is calculated as the difference between the market value and the tax value of the company. As a practical approach, the market value is based on the accounting values per 31 December 2006. Financial assets are not subject to taxation. Two thirds of the calculated profit shall be charged to income with a 10 per cent linear depreciation, as from the fiscal year 2007. One third of the deferred tax can be set aside to an environmental fund. However, if the environmental fund is not used to specified environmental measures, the tax will be payable.

The Government will take an initiative to international co-operation against tax competition and refund schemes for employment of seafarers, and address these problems before the European Economic Area (EEA), the Organisation for Economic Co-operation and Development (OECD) and the World Trade Organisation (WTO).