The special provisions for the special taxation arrangement in the Taxation Act sections 8-10 to 8-20 are referred to as the Norwegian tonnage tax regime. The Taxation Act section 8-11 sets out requirements concerning the kind of assets companies within the scope of the arrangement must own (qualifying assets) and the kind of assets they may own (legal assets).

The Norwegian tonnage tax regime

Requirements for companies within the arrangement

In order to be covered by the special provisions, the company must be a Norwegian-registered limited company that owns ships or vessels, either directly or indirectly through another company. The other company could be a shipping partnership or limited partnership, for which income will be assessed according to the rules within the arrangement on the proportional share owned by the partner in the arrangement. The requirement for indirect ownership of ships may also be satisfied if the limited liability company owns shares in another limited liability company that is covered by the arrangement. The smallest permissible share 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 ships that carry out seismic seabed surveys and contractors’ vessels.

Neither the limited liability company within the arrangement nor the underlying companies referred to above may own any fixed assets other than ships and vessels, not even shares or ownership interests in other companies, with the exception of listed shares. However, the company may have ownership interests in a pool company, i.e. a company through which a number of shipping companies collaborate by utilising ships commercially through joint management and distributing the profits according to a distribution key. The company can also 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 that are participating in a pool company in which the group is also participating. The company may also be engaged in other defined activity linked to renting 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 that are consumed onboard, and activity linked to passenger terminals.

Accordingly, a company within the arrangement is solely a ship-owning company that does not own any fixed assets other than ships and vessels, and that 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. Alternatively, it can own them through a share in other companies. The company may also own fixed assets necessary for associated activity, except for real property, and may also have employees linked to this activity. 

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 rented out to an operating company outside the arrangement that operates on its own account and at its own risk in order for the owner company to be covered by the arrangement. As regards such vessels that are used in the North Sea, only bareboat rental income can therefore be covered by the arrangement.

Generally, there’s also a requirement that a portion of the tonnage must be EEA-registered (flag requirements), see section 8-11, subsection 8 and 9. In addition, there are requirements as to the business activities of companies within the arrangement, see section 8-13. Companies that meet the conditions and wish to enter the arrangement must effect an income tax computation according to the rules set out in section 8-14 of the Taxation Act.

Taxation of companies within the arrangement

Companies within the arrangement are in general exempt from tax liability on ordinary income, see section 8-15, subsection 1 of the Taxation Act. However, the company is liable for tax on financial income according to the rules set out in section 8-15 of the Taxation Act. Instead of tax on shipping income, the company must pay tonnage tax according to section 8-16 of the Taxation Act.

When the shipping tax company distributes to taxpayers outside the arrangement, the ordinary tax rules appply (the shareholder model and the exemption method). The same applies when shareholders outside the arrangement realise shares in the company.

Entering the arrangement

Operating income and value increases of fixed assets that occur after entering the arrangement are tax-free. However, any untaxed income and value increases before the company enters the arrangement will be liable for tax. The company will therefore be taxed on the difference between the fair value and the tax value at the time of entering the arrangement. The profit can be entered in the profit and loss account, while any loss will lapse. However, shares and other financial assets that 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 arrangement and will be valued at their tax value according to the continuity principle.

As noted above, ownership interests in businesses assessed as a partnership will also be valued at fair value. In order to avoid circumvention, sales of such ownership interests to a company taxed as a shipping company from a related company outside the arrangement will be taxed on the buyer based on the difference between the fair value and the seller's tax value. Because the ownership interests are covered by the exemption method, such a sale would otherwise have resulted in the company avoiding taxation upon entering the arrangement. 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 entered in the profit and loss account.

Exiting the arrangement

Companies that meet the conditions may choose to exit the arrangement, see section 8-17, subsection 1 of the Taxation Act.

There is no separate taxation in connection with the exit. All operating revenues that have been earned and value increases of fixed assets that have occurred while the company was covered by the arrangement 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. Section 8-17, subsection 2 of the Taxation Act sets out rules regarding how the tax values should be calculated when exiting the arrangement. As is the case upon joining the scheme, financial assets that fall under the exemption method must be assessed at cost price, while other financial assets must be assessed at their tax value. Ownership interests 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 arrangement, 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 arrangement, the withdrawing partner will be bound by the tax value that is in the company. An excess or reduced price must therefore be calculated and then offset against future profits or losses from the same company that has caused the difference.

In order to prevent companies from withdrawing from the arrangement when they record a deficit and then subsequently re-entering once they have generated a profit, it’s prohibited to receive group contributions with income-equalising effect during the first three years after withdrawal.

If a company exits the arrangement before the end of the 10-year period, it cannot re-enter the arrangement until after the end of the 10-year period, see section 8-12 of the Taxation Act. Companies that break certain conditions that apply within the arrangement must exit the arrangement. For some breaches, the company may avoid exiting if the conditions are corrected within set deadlines.

For more information regarding the Norwegian tonnage tax regime see the guide Skatte-ABC (in Norwegian only).