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Norway-EEA Member State

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EFTA Court

delivers advisory opinion on Norwegian tax rules on maximum credit allowance for tax paid in another EEA state

On 7 May 2008, the European Free Trade Association (EFTA) Court delivered its judgment in the case of Seabrokers AS v. Staten v/Skattedirektoratet (E-7/07). The questions referred to the Court related to whether the domestic rules on the calculation of maximum credit allowances for foreign tax paid in another EEA State are contrary to Art. 4 of the EEA Agreement on the prohibition of discrimination on grounds of nationality, Art. 31 of the EEA Agreement on the freedom of establishment, and Art. 40 of the EEA Agreement on free movement of capital.

In Norway, income tax is assessed based on the principle of net income taxation. Under the Tax Act, the maximum credit allowance is calculated on basis of the net income in another EEA State after pro-rata deduction of expenses, such as interest and group contribution, proportionate to the part of the global income derived in another EEA State (or non-EEA state). However, the rules regarding pro rata allocation of group contribution are changed as from the fiscal year 2007, and the Court's remarks regarding group contributions are thus only of historical interest.

(a) Facts. Seabrokers AS (a private limited company) operated a real estate business in Norway where it developed and rented out its properties. The properties were financed by loans secured by mortgages on the properties. In addition, Seabrokers AS had a branch in Aberdeen in the United Kingdom, whose only business activity was shipbroking. The branch had no investment in real property. No loan (and, therefore, no interest expense) was related to the shipbroking activity in the Aberdeen branch.

(b) Issue. The question for the EFTA Court to answer was, in essence, whether it is contrary to the freedom of establishment for an EEA State (the home state), when calculating the maximum credit allowance for tax paid in another EEA State (the host state), to apply a pro rata allocation of the interest expenses of a company, and a pro rata allocation of the group contributions, to income earned through its branch in the host state. Further, the EFTA Court was asked whether the answer depends on the expenses being linked solely to the business activities in the home state.

(c) Decision. The EFTA Court concluded that:

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An EEA State which attributes, in applying the principle of net income taxation, a portion of debt interest expenses of a company to income earned through its branch in the host state, when calculating the maximum credit allowance for tax paid in the host state, restricts the freedom of establishment within the meaning of Art. 31 EEA Agreement, insofar as the expenses can only be linked to the company's business in the home state; and

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An EEA State which attributes, in applying the principle of net income taxation, a portion of a company's costs in the form of group contributions made to other companies under the home state's fiscal jurisdiction to income earned through the company's branch in the host state, when calculating the maximum credit allowance for tax paid in the host state, restricts the freedom of establishment within the meaning of Art. 31 EEA Agreement.

The EFTA Court also concluded that it will only address the questions referred to under Art. 31 EEA Agreement because:

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Art. 4 EEA Agreement applies independently only where specific provisions preventing discrimination do not apply; and

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Should the Norwegian rules have restrictive effects on the free movement of capital (Art. 40 EEA Agreement), this would be the unavoidable consequence of a possible obstacle to the freedom of establishment.

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