In autumn 1996, the Storting decided that operating revenues from shipping should be exempt from ongoing taxation, provided that the profit is retained within the enterprise. However, it was also decided that shipping companies had to pay a tonnage tax on their net tonnage, as well as ordinary income tax on any net income from financial items. From the 2007 income year, the scheme was amended, so that operating revenues finally became tax-free. However, of the latent tax obligation at the time of transition to the new scheme, two thirds must be paid over a period of ten years, while one third can be invested in environmental initiatives. The payment claim has been estimated at around NOK 14 billion, while a further NOK 7 billion can now be invested in environmental initiatives instead.
The description below presents the status of the scheme from the 2007 income year onwards.
Requirements on companies in the scheme
In order to be covered by the special rules, the company must be a Norwegian-registered company which owns ships or vessels, either directly or indirectly through another company. The other company could be a shipping partnership or limited partnership, which will then be assessed according to the rules within the scheme as regards the proportional share that is owned by the partner in the scheme. The requirement for indirect ownership of ships may also be satisfied if the limited company owns shares in another limited company which is covered by the scheme. The smallest permissible holding for such indirect ownership is 3%. The term ‘vessel’ also covers auxiliary vessels for use in petroleum activities, such as supply vessels and anchor handling vessels, as well as contractors’ vessels and ships which carry out seismic seabed surveys.
Neither the limited company within the scheme nor the underlying companies referred to above may own any fixed assets other than ships or vessels, not even shares or holdings in other companies, with the exception of listed shares. However, the company may own shares in pool companies, i.e. companies through which a number of shipping companies collaborate by utilising ships commercially through joint management and distributing the profits that are generated according to a distribution key. The company can otherwise own financial assets. In addition to leasing out and operating both their own ships and hired ships, the companies referred to above may also carry out the strategic and commercial management of ships, including ongoing management. Such management can also be practised with respect to vessels owned by other companies within the same group, and with respect to ships belonging to other companies which are participating in a pool company in which the group is also participating. The company may also carry on other defined activity linked to the leasing out and operation of ships within the group, e.g. the handling of goods linked to the transport operation, the sale of goods and services which are consumed onboard, and activity linked to passenger terminals.
Accordingly, a company within the scheme is solely a ship-owning company which does not own any fixed assets other than ships and vessels, and only generates revenues through operating the ships and other closely associated activity as described above, as well as through a return on its financial assets. The company does not need to own the ships directly, as it can own them through a stake in other companies. The company may also own fixed assets as necessary for associated activity, except for real property, and may also have employees linked to this activity. However, companies in the scheme may not offer loans to related companies or persons outside the scheme, nor may then provide guarantees or collateral for such companies or persons.
A further requirement is that, as regards contractors’ ships, the companies cannot generate income from oil activity on the Norwegian continental shelf. Such vessels must therefore be leased to an operating company outside the scheme which operates on its own account and at its own risk in order for the owner company to be covered by the scheme. As regards such vessels that are used in the North Sea, only bareboat rental income can therefore be covered by the scheme.
From 1 July 2005, a flag requirement was introduced into the scheme. According to this flag requirement, if the proportion of net tonnage in the company or group-affiliated companies within the scheme which sails under a flag belonging to a state within the EEA was less than 60 percent of the total tonnage, this would not have to be reduced relative to what was the case as of 1 July 2005. This requirement does not apply if the flag proportion within the EEA for all ships covered by the scheme did not decrease during the previous year (national flag requirement). Because of this, the flag requirement does not apply at company level for the 2006 and 2007 income years.
Taxation of companies in the scheme
Companies in the scheme will not be taxed on profits generated through the operation of vessels and associated activities. Any return generated on financial assets minus interest on debt will however constitute taxable income. The companies will only be entitled to a deduction for the component of the interest on debt that relates to the financial assets based on a proportional distribution. This proportional distribution must also be carried out as regards taxable or deductible agio and disagio. Any negative financial result may be carried forward for deduction from a positive income in subsequent years.
As interest on debt will not be deducted effectively in its entirety in a company taxed as a shipping company, it may be more profitable if the shareholders finance the company outside the scheme. In this way, the shareholders will be entitled to a deduction for interest on debt which would not have been deducted effectively had the company itself been responsible for the financing. A calculated income will therefore be added for the company within the scheme if the equity ratio is high. This is done by taxing the company on the difference between the company's actual interest on debt and 50% of the company's book assets multiplied by an interest rate which is stipulated for each individual year.
As the operating revenue is ultimately tax-free, it will generally be possible to distribute dividends without taxation on the company's part. Because of the latent tax obligation on profits at the time of transition from the old to the new scheme as of 1 January 2007, such distribution over and above earned profits in the new scheme may nevertheless trigger correction income. The same applies to distributed group contributions.
The tonnage tax is calculated on the basis of the vessels’ net tonnage, and is collected regardless of the company’s financial result. Ships that satisfy certain environmental requirements can receive a reduction in tonnage tax of up to 50%.
Companies within the scheme can pay and receive group contributions freely. However, group contributions will not be income-equalising when either the payer or the recipient is covered by the scheme.
Joining the scheme
Operating revenues and increases in the value of fixed assets which occur after joining the scheme are tax-free. However, any untaxed income and increases in value before the company joins the scheme will be taxable. The company will therefore be taxed for the difference between the fair value and the tax value at the time of joining the scheme. The profit can be recognised via the profit and loss account, while any loss will lapse. However, shares and other financial assets which are covered by the exemption method (except for shares in underlying businesses assessed as a partnership) will be valued at cost price in the calculation in order to avoid taxation. Other financial assets will still be taxable within the scheme and will be valued at their tax value according to the continuity principle.
As noted above, shares in businesses assessed as a partnership will also be valued at fair value. In order to avoid circumvention, sales of such shares to a company taxed as a shipping company from a related company outside the scheme will be taxed on the buyer based on the difference between the fair value and the seller's tax value. Because the shares are covered by the exemption method, such a sale would otherwise have resulted in the company avoiding taxation upon joining the scheme. Such taxation will also be carried out in connection with the intra-group transfer of ships and shares in NOKUS companies. This taxable income can also be recognised via the profit and loss account.
As a transitional arrangement, assets which are normally valued at fair value when calculating the profit made upon joining the scheme will be assessed at book value at the time of joining during the 2007 and 2008 income years. If the company leaves the scheme or sells vessels or shares in a business assessed as a partnership and NOKUS within three years after joining in this way, the company will be taxed for the difference between the fair value and the value which was used as a basis at the time of joining.
Withdrawal from the scheme
It is voluntary for shipping companies to opt to be assessed in accordance with the rules that apply to the scheme. Withdrawal from the scheme is also voluntary. If the company fails to comply with the requirements concerning assets and operation, the company may be compelled to withdraw from the scheme. However, most breaches of the scheme's rules can be rectified within two months after the breach first arose.
All operating revenues which have been earned and increases in the value of fixed assets which have occurred while the company was covered by the scheme will ultimately be tax-free on the company's part. Upon withdrawal from the scheme, a market value must therefore be established for the company's fixed assets, which will be used as a basis for the company's subsequent tax-related depreciation and income settlement. As is the case upon joining the scheme, financial assets which come under the exemption method must be assessed at cost price, while other financial assets must be assessed at their tax value. However, no taxation will take place at the time of withdrawal from the scheme, except in the case of withdrawal within three years after joining under the transitional arrangements in 2007 or 2008. If the company has an untaxed profit from the transition from the old to the new scheme, or unused funds for environmental investments, these will also be taxed upon withdrawal from the scheme.
Shares in businesses assessed as a partnership must also be valued at fair value upon withdrawal. If such a company has no other partners outside the scheme, fixed assets in the business assessed as a partnership will also be set to fair value. If the business assessed as a partnership has partners outside the scheme, the withdrawing partner will be bound by the tax value that is in the company. An excess price and a reduced price must therefore be calculated and then offset against future profits or losses from the same company that are due to the difference.
In order to prevent companies from withdrawing from the scheme when they record a deficit and then subsequently re-joining once they have generated a profit again, it is prohibited to receive group contributions with income-equalising effect during the first three years after withdrawal.