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Norwegian Tax Appeals Board Holds PE May Not Deduct Costs for Use of Parent Company's Employees or Assets

On 9 May 2019, a decision of Norway's Tax Appeals Board was published concerning the allocation of costs to a permanent establishment in Norway. In particular, the decision addresses whether a deduction may be granted for the use of the parent company's employees and assets in determining taxable income of a permanent establishment.

The permanent establishment at issue was constituted by a foreign company that performed maintenance and development service in Norway that involved the assignment of personnel for a duration exceeding 12 months. In 2014, the Norwegian tax office informed the company that it was considered to have a permanent establishment in Norway (as provided for under the applicable tax treaty) and in 2015, the foreign company submitted a return for the 2014 tax year. In reviewing the return, the tax office questioned the amount of income and deductions claimed for payments made to the head office, which include payments for subcontracting of employees and the leasing of machinery from the head office. The tax office did not accept these payment amounts, which was objected to by the foreign company and referred to the Tax Appeals Board.

In its decision, the Tax Appeals Board maintained that the foreign company could not lease operating assets and employees from the head office to the branch and refused the deduction for rental costs. While acknowledging the treatment of a permanent establishment as an independent legal entity to which arm's length costs can be assigned, the Board found that this independence fiction has its limits. In particular, this independence fiction does not mean that a company can rent out workers and assets to itself. This is because the permanent establishment does not exist before there are personnel and operating equipment in use at the site.

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