Norway tax: Transition rules under tonnage tax regime disputed

Two Norwegian courts recently reached opposite conclusions in cases involving the tonnage tax system introduced in 2007, with one court deciding that the transition rules violate the Constitution and the other court holding that they did not. The decisions were based on the fact that the courts had different opinions of the former tonnage tax regime: one court found that the old regime gave the shipping companies a tax exemption, while the other court concluded that the former regime was never intended to grant final tax exemptions, only deferred taxation.

The dispute has arisen from the new tax system for shipping companies that was introduced on 1 January 2007 to improve the competitive position of the shipping industry. Until that date, a Norwegian-incorporated shipping company could elect to exempt its shipping income from corporate income taxation by opting to be taxed under the tonnage tax system instead.

Under the tonnage tax system, no tax was levied on gains and profits from shipping activities when retained in the company, as long as the company stayed within the tonnage tax system. Tax was imposed, however, when taxable dividends were paid to shareholders or the company withdrew from the system.

Under the 2007 regime, profits from shipping operations are tax-exempt on a permanent basis and shipping companies can distribute profits without further taxation. Transition rules introduced with the 2007 reform, however, provide that companies that operated under the old tonnage tax regime generally would have to recognize income deferred from taxation (in the sense that profits were not distributed) over the following 10 years, regardless of whether profits were distributed during this period (two-thirds of the untaxed profits have to be recognized as taxable income, while one-third must be invested in environmental measures).

These rules gave rise to considerable debate as to whether they violated the principle in the Norwegian Constitution against retroactive legislation that results in liabilities. The Parliament has consistently upheld its position the rules are not in conflict with the Constitution, because the old regime merely gave shipping companies a right to defer taxation. Shipping companies, on the other hand, argue that no taxes were levied under the old regime and they are now required to pay tax, that the transition rules are unreasonable and in conflict with the Constitution.

This issue is not likely to be resolved any time soon, since the parties in both cases are likely to take the dispute to the Norwegian Supreme Court.